A month after President Mauricio Macri removed currency controls as part of an effort to end Argentina’s decade of exclusion from international capital markets, the peso continues to trade in splendid isolation from its peers.
The peso fell 27 percent on its first day of freedom last month yet since then has weakened just 1.9 percent, outperforming the 3.9 percent drop in emerging-market currencies. The currency is no more correlated to the rest of emerging markets than it was in November, when the central bank managed daily moves, data compiled by Bloomberg show.
Under previous President Cristina Fernandez de Kirchner and her late husband and predecessor, Nestor Kirchner, Argentina restricted trade, defied holders of its defaulted debt and managed the currency with daily interventions from the central bank. Macri, who took office last month, is allowing the peso to float freely as part of his plan to stimulate growth and reinsert Argentina back into the global economy, allowing it to borrow and attract more investment from abroad.
“Argentina’s currency is unhooked from international markets,” Gustavo Quintana, a currency trader at Rabello Cia, said from Buenos Aires. “Argentina’s economy has been disconnected from the rest of the world for the last few years, so it’s a logical consequence. The transition is turning out to be more gradual than the explosion that was originally expected.”
The peso fell 1.5 percent this week to 13.6 pesos per dollar in the MAE electronic trading platform. Economists have raised their forecast for the peso more than any other currency in the world, according to data compiled by Bloomberg. A month ago they estimated the peso would slide to 14.5 per dollar by the end of March, now they see 14 per dollar.
Trading volume doubled in December from the previous month to $6 billion, yet it remains lower than the $9 billion traded in April 2011 before currency controls were put in place. Foreign investors are being cautious before they jump into the peso, said Ezequiel Aguirre, a foreign exchange strategist at Bank of America. Argentina has yet to reach a deal with holders of its defaulted bonds from 2001, led by billionaire hedge fund manager Paul Singer. Meetings with the creditors have been pushed back to Feb. 1 with mediator Daniel Pollack citing logistical difficulties.
"It has been years of capital controls and investors are still waiting for more fiscal announcements and for a resolution with the holdouts," Aguirre said from New York.
An end to the country’s decade-long legal dispute with creditors and subsequent return to capital markets would be positive for the currency as money raised abroad helps refill depleted reserves, Aguirre added. Argentina’s reserves fell to a nine-year low after years of central bank intervention to prop up the peso. Since Federico Sturzenegger took the helm as central bank president in December, the bank has not intervened in the peso and reserves have increased by $1.4 billion.
New Finance Minister Alfonso Prat-Gay, speaking in an interview in Davos on Wednesday, said the country would return to growth “not because we’re going to do great things but rather because we’re going to stop doing horrible things.”
Argentina’s peso stayed stronger than expected as grain exporters who had awaited the free-float to sell their crops at a higher price than the previous rate sold $2 billion in the last three weeks of the year. Pent-up demand for greenbacks by importers was lower than anticipated, suggesting that they hedged their position ahead of the devaluation.
“It’s likely that companies prepared for the devaluation, as it wouldn’t have been convenient to stay in a peso position knowing that debts were in dollars,” said Ruben Garcia, secretary of the Chamber of Argentine Importers. “Good CEOs would have taken the precaution of building a position in dollar bonds to be in a better position once the adjustment happened.”
Volatility is likely to continue until the peso finds its stride, said Rafael di Giorno, a director at Proficio Investment in Buenos Aires.
“The market is still finding its equilibrium point,” Di Giorno said. “It will probably take another two or three months to understand where the peso will end up.”