Argentine peso weakens sharply after central bank abandons crawling peg

BUENOS AIRES: Argentina's peso weakened sharply on Friday after the country's central bank said it would abandon its uniform devaluation strategy and allow greater volatility in the price of the hard-hit currency.

The peso, which has been caged by capital controls since late last year, closed down 0.91% to 76.95 per dollar. It has generally weakened less than 0.1% per day, creating an artificially steady devaluation in recent months.

Meanwhile, the black market peso fell 2% to a record low 149 per dollar on Friday, almost 95% away from the official rate. The gap has widened drastically this year due to high demand from savers limited to buying $200 per month through the banks.

Argentina's central bank and Economy Ministry announced a raft of measures on Thursday to stimulate growth and support the peso, including a freer "managed float," tax cuts on exports and higher rates on passive repos to stimulate saving in pesos.

"In our view, these measures are steps in the right direction as they depart from the systematic reaction function of more FX controls shown previously," wrote Sebastian Rondeau, a Latin America strategist at Bank of America Securities.

Argentina, which is just emerging from its ninth sovereign default after restructuring over $100 billion of its foreign debt, is facing an estimated 12% economic contraction this year, which would be its third straight year in recession.

The government needs to bolster confidence in the peso and attract investors who had grown jittery about tightening state controls back to the country.

Citi, in a note, was less rosy on the measures, saying they were unlikely to "change the current dynamics" to help stabilize the FX market or help bolster dollar supply.

"The measures are likely to be seen as insufficient and hence run the risk of being counterproductive," it said.