Argentine Peso Crashes Most Since 2015 Free-Float Despite 600bps Rate-Hike

Update: It's getting worse - way worse. This is now the biggest drop since 2015's regime shift to a free-float...

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For the second time in a week, Argentina's Central Bank has hiked its key rate 300bps today (300bps on 4/27) to 33.25% for 7-Day repo in an attempt to stall the currency's freefall... for now it's not working!

Today's actions follows yesterday's collapse, as we detailed here, as Morgan Stanley analysts led by Fernando Sedano wrote in note:

"Both domestic and external factors are likely to test Argentine assets again, keeping volatility and risk premia high,"

"Because Argentina has used almost two-thirds of the FX reserves acquired this year, we think any eventual FX volatility may have to dealt with via further hikes"

Additionaly, Nomura said in a note yesterday that:

"traders will need further signs from the Macri administration and from the central bank that there's commitment to lowering inflation and narrowing the deficit...

it's important officials aren't tempted with pro-growth policies like in December/January. "

And, despite the rate-hike today - seemingly reaffirming this commitment to battle a plunge into hyperinflation, as Bloomberg reports today, Argentina's central bank (BCRA) seems cornered between a rush for dollars and a fragile economy, as spot sales and surprise rate hikes fail to arrest the peso’s depreciation and may lead officials to eye a different angle.

"Eventually, the central bank might decide to intervene in the onshore NDF (Rofex) as well," said Daniel Chodos, a strategist at Credit Suisse in Buenos Aires.

Critically, Chodos says that such a move would undermine credibility, given that a free market was one of the main planks of Macri’s government.

"The BCRA can combine all its instruments to stabilize the exchange rate market, but it is appropriate that it does not lean too much against external volatility," Mauro Roca, managing director for emerging markets sovereign research at TCW Group in Los Angeles, said yesterday.

The problem, as Bloomberg notes, is that BCRA no longer fighting against global trend.

The Argentine Peso is the worst EMFX currency today by a significant distance.

Comments

charlewar Thu, 05/03/2018 - 12:27 Permalink

Having spent most of the last 7 yrs in Argentina it becomes difficult to describe all the shortfalls of their economy that cause this mess.

 

My prognosis is that the country will survive and prosper though there is more immediate pain to endure here.

 

 

AurorusBorealus DEMIZEN Thu, 05/03/2018 - 12:55 Permalink

Prior to the Macri government, the Argentine government had little external debt, except the debt that Paul Singer held and used to justify an act of international piracy: a crime for which, by the way, he has yet to be prosecuted.  The Macri government has begun borrowing again from international and Wall-Street banks, but the level of external debt is not large relative to the size of the economy.

The Peso frequently falls in January and February of each year as Argentine consumers purchase dollars for international travel.  Forex traders have begun to anticipate this early year move in the Peso and begin dollar purchases in December, which is what begins the Peso's mid-summer fall each year.

The downward move of the Peso is not dramatic.  It has fallen only 5%, which 2 years ago often was how much the Peso would move per day on FX markets: up and down (though down more often than up, of course). However, the timing of this move in the Peso is very suspicious.  The underlying economics do not fit the move.  The Argentine government deficit (or the rate at which the government is incurring debt) is decreasing significantly.  Foreign reserves are growing.  It has been another abundant season for Argentine agriculture, which means a heavy inflow of Yuan as soy arrives in China over the next few months. 

My suspicion, though it is only a suspicion, is that China is deliberately selling Pesos via proxies to cause weakness in the Peso and reduce the cost of soy imports.

That being said, there is one underlying economic condition in Argentina that is very troubling, that is certainly contributing to Peso weakness, and is not related to international manipulation of FX markets.  That problem is the enormous expansion of consumer credit in the past 4 years, dating back to the last years of the Kirschner government.  5 years ago, few Argentines had bank accounts, and even fewer sought bank credit.  Argentines did not trust the banks, and the economy was mostly a cash economy in which people purchased what they could afford.  In the past 4 years, however, the expansion of credit for the purchase of autos and homes has expanded dramatically.  This expansion of credit coincides with an additional expansion of consumer credit, both via credit cards and merchants offering merchandise on payment plans (with interest).

The expansion of consumer credit has increased the money supply (in what is, mostly, a closed system, since few Pesos circulate externally) and has offset many of the government's efforts to curb inflation.  Also, it has pulled demand forward and created the conditions for a future recession and contraction of demand.  Higher interest rates are therefore welcome and a better solution to the Peso's fall than intervention in FX markets.

Argentina cannot wage war with China in the FX markets.  China's reserves are orders of magnitude larger than those of Argentina. Chinese manipulation (if such manipulation indeed exists) is a problem that must be resolved through foreign policy and not through currency market intervention.  If the U.S. imposes tariffs on Chinese goods, Argentina should play this to their advantage by also increasing tariffs on imports and exports to China to match the new U.S. tariffs.  Argentina must have a firm hand in dealing with China.  Every weakness will be exploited by the Chinese to gain trade advantages, and Argentina must play the multi-polar game to its best advantage, as does every state in the modern world.

In reply to by DEMIZEN

Antifaschistische DEMIZEN Thu, 05/03/2018 - 15:09 Permalink

I'm sure you're 1/2 right.

Do you really think any .gov, anywhere in the world, will give up their god given right to counterfeit their fiat currency to enrich themselves and their insider friends, for the sake of any monetary discipline? (whether it's the infamous gold, silver, or even a crypto-currency)  NO.  If they  use a crypto, then they'll be able to generate them out of their ass like they do current fiat.  So, how would that be the answer?

In reply to by DEMIZEN

Jesus von Einstein charlewar Thu, 05/03/2018 - 12:41 Permalink

I'm surprised Argentina doesn't put more eggs in the tourism/advertising basket.

Lots to do for nature lovers in Patagonia.  And lovers of steak and wine can eat and drink top notch stuff for cheap money.  Very 'European' country ethnically and culturally  {my understanding is the same 'globalist' forces are at work, as always, trying to increase non-Euro immigration...can't have Europeans being majorities anywhere now, that's racist, of course}...

 

It's not like they're Venezuela.  Argentina's problems are solvable in the long run. 

 

In reply to by charlewar

TheGardener Jesus von Einstein Thu, 05/03/2018 - 13:26 Permalink

Tourism is a cancer that eats away at all the lovely places left at Earth.

Not my kind of a solution for a sovereign and proud nation.

The steak and wine is not really cheap but a real bargain for the supreme quality

you`ll get.

Globalist forces at work don`t favour smallish independent countries. And

you are probably right about being a target for being mostly white and clean.

 

Argentina`s problems solvable in the long run ? I hope so.

They are slipping since the 1930s/40s and may have passed peak decadence.

 

In reply to by Jesus von Einstein

1033eruth charlewar Thu, 05/03/2018 - 14:19 Permalink

HA!! You mean like Venezuela type pain?  That's more than immediate.  That means a collapse.  Kind of funny.  People fleeing Venezuela to Brazil, Chile and Columbia and people are going to be fleeing Argentina and follow the trend here, people constantly fleeing economic conditions in countries that are collapsing LIKE DOMINOES.  

Doug Casey's little Argentina experiment is going to crash and burn.  Good thing he's remote.

In reply to by charlewar

AurorusBorealus 1033eruth Thu, 05/03/2018 - 14:34 Permalink

Lol... I remember everyone predicting the collapse of Argentina when Paul Singer was publishing stories every day pushing the "Argentine collapse" story.  I remember everyone predicting the collapse of Argentina's economy when Macri decided to float the Peso again.  It did not happen then, and it is not going to happen now.  So often, these "economic analysts" are nothing but paid shills for various business interests.

There is no question that someone is attacking the Peso on the Fx markets, and that someone could only be China.  No one else has any real reason, at this point in time, to do so.  Macri is a favorite of Wall Street and the U.S. .  The attack will lose momentum soon, because China does not have unlimited Peso reserves.  At that point, the Peso will rebound sharply as Argentine agricultural exports are purchased en bulk by any number of countries.  The silos are completely full here, and there is much to export.

Everything will be OK.

In reply to by 1033eruth

Killdo charlewar Thu, 05/03/2018 - 18:04 Permalink

Still they are much happier than Americans or Brits. Friends I have there all have good careers, families, great wives...lots of friends. They play soccer with their old friends every week and they meet every week to cook dinners (only guys - although women are welcome too - but they understand the importance of giving each other space). The houses, the luxury and beauty I have seen there I have never seen in the USSA. And I know some very wealthy Americans

Also all my friends there (apart from what I listed above) play in rock bands, act and/or paint or sculpt. They all know how to cook and BBQ. I saw maybe 10 or so beggars in Buenos Aires last time I was there - compare that to LA, SF, NY where I see thousands - shitting in gutters where they also sleep - syringes everywhere...

In reply to by charlewar

TheGardener English herbsman Thu, 05/03/2018 - 12:46 Permalink

I just happened to have some Argentine tenderloin at lunch today.

It  is still in a league of it`s own , even though I raise grass fed cattle myself.

Saw US beef tenderloin at a wholesale place yesterday for three times the price.

Would not even buy that hormone/antibiotics laced poisonous shit for one third

of the real thing.

Argentina has no friends for sure among those trying to push exports of US "goods".

 

P.S. wine from the Mendoza valley as I type...not yet the consistent quality approach coca cola variety as on most shelf`s today

In reply to by English herbsman

AurorusBorealus TheGardener Thu, 05/03/2018 - 14:06 Permalink

"The come and see my place" is a genuine offer.  "Be not forgetful to entertain strangers: for thereby some have entertained angels unawares."  I do not have a cattle farm nor a vineyard, however.  I am a writer and teacher of no great means.  I do live in cattle country, however, and some of my neighbors do have large cattle-farms.  Recently, I provided a room for two girls from Switzerland who were backpacking through the country: charming girls with a remarkable gift for languages.

In reply to by TheGardener

Argentumentum AurorusBorealus Thu, 05/03/2018 - 17:23 Permalink

Hi AB, I do not comment a lot (time constraint, do not feel too confident in my language skills etc.) but I have been here from the very beginning of ZH. I am a writer too, just that not in English. The site is not the same (the site has been corrupted, BS articles etc.) but comments (although not at the same level as it used to be), are still worth reading, for me your comments for me have been among of these worth reading. I found my "paradise" in Brazil       (a perfect place despite the general stupidity and criminality of the state). what you wrote about Argentina, the same pretty much holds true in Brazil. In Argentina, I have visited Salta, visited Doug Casey's place as well but did not buy the property there. If you accept, I would come some time to visit and chat with you while sipping a good wine ))  How can I contact you ?

 

 

In reply to by AurorusBorealus

surf2liv Thu, 05/03/2018 - 12:56 Permalink

Although President Maurice Macri doesn't look tribal..get a load skiable nose of his father

https://www.google.com/imgres?imgurl=http://www.clarin.com/politica/Fra…

 

same prob wherever you go..Macri took those loans at 7.5% for 100 years..Arg is dead...humorous note..Cristina was asked by school children ..which Shakespeare should they all read, Romeo and Juliet? to understand our world   ..Cristina Kirchner said..no Merchant of Venice..ha

cheech_wizard Thu, 05/03/2018 - 13:50 Permalink

Speaking of countries in South America, Venezuela's inflation rate, already by far the world's highest, spiked from 4,966 percent to nearly 18,000 percent in just March and April — a trend that, if it continues, could push the country's annual rate to more than 100,000 percent by year's end, economists say.

http://www.miamiherald.com/news/nation-world/world/americas/venezuela/a…

Standard Disclaimer: White courtesy phone for Steve Hanke...

mosfet Thu, 05/03/2018 - 14:12 Permalink

Too little - too late.  Fed, ECB & BoJ making the same mistake with too little tightening while lying about inflation.  From this point forward you central banks have the ability to rescue only one - markets or currency.

surf2liv Thu, 05/03/2018 - 14:24 Permalink

Macri put the dollars that they borrowed..on a plane in Ezeiza..  nice photos..

https://www.revolucionpopular.com/politica/urgente-con-macri-no-se-la-l…

 

A few days ago Roberto Navarro had anticipated that in Ezeiza they were warning about supposed flight of dollars with trucks. Today a series of photos of the Ezeiza International Airport where there are trucks of flow in the same airstrip were viralized.

"The guys do not have an economic plan, they have a business plan, they are doing their business, if the previous government had had a run like this, the cover of the newspapers would have been a fire, 4,500 million dollars escaped. people of the trucks say that it has been a long time since there were so many trucks for Ezeiza, to take away the money, they are taking away the dollars, there are some bonds called Lebacs that the Central Bank gives them and you a month , after two months, after three months, he returns the twine, many of which were bought by the banks.

 

Sometimes the Tribe is just outright blatant..Who's gonna take them down anyway?..We lost the fight at Stalingrad

TheSharpenedPen Thu, 05/03/2018 - 14:35 Permalink

Venezuela was going to go first world, but then they went socialist. America was leading the world and then it went socialist. Europe drove civilization, but then it went socialist. Argentina was a bustling economy, and all of a sudden, bammo - they went socialist.

The entire world is going increasingly socialist, to varying degrees, adopting liberal gender reassignment and breaking everyone down into quota groups based on 52 genders, various skin tones, and sexuality, with mass immigration, carbon taxes, and oppression for all. Either we change course, or this will be our own reality in North America as well soon enough.

 

Prosperity doesn't spring to life from higher taxes and mounting debt.