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Devaluation of peso halted after record highs against the dollar

A sign advertises the price of exchange rate between the dollar and the peso, in this photograph taken in Buenos Aires yesterday.

Economists worry about the effect on inflation, but agree it was necessary to deflate an ‘overvalued’ peso

The largest devaluation since President Mauricio Macri’s administration lifted capital controls in 2015 came to a halt yesterday after the intervention of state-supported and major private banks. For nine consecutive days the peso had climbed against the dollar, starting with an exchange rate of 16.11 pesos to the US dollar on June 26 to a high of 17.50 pesos yesterday, until finally falling back 23 cents before the close of markets.

There was no specific international event that triggered the shift — such as was seen previously with Brexit, the election of US President Donald Trump or the economic crisis of Brazil — leading analysts to speculate whether the peso had reached its floor.

Many economists worried that the peso’s sharp depreciation would hurt the government’s goal of lowering inflation, while others believed it was necessary due to what they viewed as an overvalued peso.

“I don’t see any problem with the dollar increasing, especially because the appreciation had been considerable. The risk is if the jump is too large ... but the Central Bank has the instruments to regulate the market and avoid it,” former Central Bank president José Luis Machinea told the La Nación newspaper yesterday.

He argued that the depreciation was necessary despite the increase in inflation that it would bring because Argentina’s exports were suffering from what Machinea considered to be an overvalued peso.

“Without an increase in exports there can’t be sustained growth and the volume of exports decreased by four percent in the first five months of the year,” said the former Central Bank governor.

According to a Reuters survey taken from currency traders published yesterday, the peso is forecast to be at 17.25 pesos per dollar over the next year, similar to its current value. This prediction is lower than the Central Bank’s last (REM) market forecast that estimated a rate of 18.8 pesos per US dollar. The Reuters survey predicts that on average, Latin American currencies across the board will most likely be stable with little or no major movements in relation to the US dollar for the next 12 months.

Abrupt reverse

Financial analysts explained how big sales orders from private banks are what led to an abrupt reverse in the depreciation yesterday along with a few exporters that decided to sell. “First a sales order appeared from a private bank — that could have been close to US$20 million — and then a few more sales joined when the exchange rate started to show a falling trend,” ABC Exchange Market analyst Sebastián Centurión told Ambito.com.

In this context, the Central Bank decided to cut the interest rate for the Lebac US dollar-dominated bonds to 25.8 percent after having increased it to 26 percent on Wednesday, although it was still higher than the June 18 interest rate that closed at 25.5 percent.

With the latest inflation estimates for June being much higher than expected, the peso’s plunge could have a significant impact on prices which many analysts believe explain why the Central Bank had decided to sell 4.4-billion-pesos worth of bonds.

“They should raise the Lebac rate in secondary markets as a first measure to put a stop to the abrupt dollarisation, and in a worst case scenario, go out and sell dollars,” said Centre for Economic Studies of the South (Cesur) economist Amilcar Collante.

For the journalist Guillermo “Willy” Kohan, an economic specialist, what was surprising was how the government had taken so long to react to the peso’s devaluation.

“Sectors of the financial market had been for some time very comfortable with the exchange rate and were gaining fortunes with the interest rate. Now they are annoyed and are asking for the Central Bank to intervene,” said Kohan to the El Cronista newspaper.

The government views this as positive as it prevents investors from taking advantage of the fixed dollar and ending the so-called carry trade. Those investors who made these type of investments would have gained more than 15 percent annually by entering and exiting the market if the peso remained at its previous exchange rate. At the end of June, Central Bank Governor Federico Sturzenegger had hinted at this when explaining the Bank’s monetary and exchange policy.

“With the “carry trade” it can go well or bad. Looking at the history of the past few months we see that 50 percent of the time it went bad,” he said.

Herald Staff

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