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September 21, 2014
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Peso sees sharpest devaluation since January

The mini devaluation caught most market operators by surprise.
By Fermín Koop
Herald Staff
Official dollar strengthens 7.5 cents to close at 8.4 pesos as ‘blue’ rate soars

With only US$10 million sold by the Central Bank, the official dollar strengthened 7.5 cents yesterday to close at 8.4 pesos, a devaluation of 0.8 percent that marks the highest daily decline in the peso’s value following the steep devaluation in January.

Meanwhile, still reacting to the government’s new debt swap, the “blue” dollar reached a new historic record by strengthening 40 cents to close at 13.95 pesos

The strengthening of the official dollar comes after last week’s complaints by the Argentine Industrial Union (UIA) over the need to devalue the currency in order to increase competitiveness abroad. Only hours before the market closed, Economy Vice-Minister Emmanuel Álvarez Agis rejected the idea of a new devaluation since he said the exchange rate is competitive enough.

“The Central Bank decided to devalue, there’s no other element that explains what happened yesterday,” a market source told the Herald. “The exchange rate was lagging behind so this was necessary. Nevertheless, I don’t see a change in strategy and the devaluation won’t be steep like what took place in January. They have learned from their mistakes.”

Traders were largely surprised at yesterday’s devaluation because they were not expecting it to be so steep, sources told the Herald. A low US$107 million was traded in the market, a sign that traders decided to wait until the end of the day for a signal from the Central Bank that would help prevent the devaluation. The signal never came. By the end of the day, the monetary authority had sold only US$10 million.

The peso exchange rate has steadily been devaluing at a snail’s pace over the last few months, with only small variations of a cent or less per day. The last time a steep devaluation had been registered was in January when the exchange rate suddenly dropped 1.21 pesos in only five days. It marked the highest devaluation of the peso in 12 years.

“The devaluation took the market by surprise but there had been complaints in the last few weeks over the need to update the exchange rate. A devaluation isn’t carried out because you want to, it’s done because you have to,” Miguel Kiguel, economist and former Finance secretary, told the Herald. “January’s devaluation put the peso in the right place but then the exchange rate remained frozen for too long. Now if things are done right, it won’t be necessary to continue devaluing.”

Meanwhile, panic over the official-rate devaluation led to high demand in the black market that pushed the “blue” dollar up 40 cents to close at 13.95 pesos, accumulating a 75-cent increase this week, mainly due to speculation after the announcement of a new debt swap. The gap between the official and the illegal dollar closed yesterday at 66 percent. The blue-chip swap also rose 19 cents cents and closed at 12.38 pesos.

“There wasn’t a change in strategy by the Central Bank, the devaluation can only be explained by tensions the government has over the exchange rate with some sectors such as UIA,” Estanislao Malic, economist for CESO, an economics think-tank, told the Herald. “There’s no financial explanation on why a devaluation would be necessary.”

No devaluation?

Asked about UIA’s complaint about the need for a new devaluation, Economy Vice-Minister Emmanuel Álvarez Agis said yesterday the government “won’t apply that plan” because when the exchange rate “suddenly rises, Argentina will be faced with tense situations.”

“I’m surprised by UIA’s statements. The government will maintain an exchange rate that is competitive enough to benefit regional economies but not so high that it hurts imports,” Álvarez Agis said. “If UIA wants to go back to the 1980s schemes with devaluation and inflation, they won’t find them with this government.”

Álvarez Agis said Argentina had a “financial problem and a problem with the dollar” at the beginning of the year and as a result “analysts said Central Bank foreign reserves would drop to US$20 billion and the dollar would reach 20 pesos.”

“Nevertheless, now we have a stable dollar, foreign reserves at US$29 billion and a dropping inflation,” Álvarez Agis said.

@ferminkoop
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