Argentines seek dollars before more bets on a devaluation

Argentine investors are becoming increasingly pessimistic about the peso, betting that the government will inevitably be forced to accelerate the devaluation after the November elections.

The growing demand for foreign exchange meant that dollars now cost 196 pesos in the parallel market used to evade exchange controls, almost double the official rate. It is the largest gap in 12 months.

Other market indicators also reflect the desperation that Argentines feel to disarm their savings in pesos. Dollar-pegged mutual fund subscriptions in October are already higher than in any month last year. The futures contracts show traders betting at 152.5 pesos per dollar in September 2022, 35% weaker than the current official rate.

“There is a growing consensus that this is not sustainable“, said Alejandro Square, head of foreign exchange strategy for Latin America of the Banco Bilbao Vizcaya Argentaria SA In New York. “There are signs of severe currency stress in the markets and usually when this type of gap is reached, the government has to do something”.

President Alberto Fernández’s dilemma boils down to the fact that his government has insisted on a slow depreciation of the official exchange rate, keeping the currency overvalued in an attempt to curb inflation that amounts to more than 50% annually.

A rapid devaluation would help ease tensions on exporters and attract foreign investment, but could add pressure to inflation and would almost certainly be politically costly for the coalition of Fernandez before the legislative elections next month.

For Argentine investors to hedge against the prospect of a currency crash is nothing new, of course. Parallel markets for buying currencies exist due to limits on buying dollars at the official exchange rate, which in itself is a sign that the government knows that the currency is overvalued. Black market rates also spiked between 2011 and 2015 when former President Cristina Fernández de Kirchner used strict currency controls and populist policies to manage the economy.

This time around, politics is playing a huge role in pessimism. Some investors believe that the Alberto Fernández government has kept the peso artificially strong to make the economy look better than it is before the elections, in which 151 seats in the national legislature are at stake. According to Cuadrado de BBVA.

That promises to be painful for Argentines who have most of their savings in pesos in an economy that is already in bad shape. Gross domestic product fell 10% last year during the pandemic and poverty rose to 40.6% in the first half of this year. Meanwhile, officials seek to renegotiate debts with the International Monetary Fund as it grapples with what Cuadrado says are a pile of nearly depleted liquid reserves.

Economy Minister Martín Guzmán said on Wednesday that the central bank’s foreign exchange reserves are sufficient to maintain the government’s exchange rate policy, noting that there are no plans to devalue the peso significantly.

For now, however, the Argentines appear to be preparing for a rapid decline, coming off the peso and “dollarizing”Your savings by buying assets immune to a currency crash.

“The dollarization process occurs naturally due to persistent levels of inflation and the lack of instruments to protect itself“, said Fernando Losada, Head of Emerging Markets Research at Oppenheimer & Co. “And the demand for dollars is also a natural consequence of the monetary financing of public spending, that is, if there is an excess supply of pesos, there will be an excess demand for dollars.”.

Since the September primary elections that showed Fernández’s ruling coalition less support than anticipated, his administration has stepped up populist policies in an attempt to regain votes. The government increased price controls, restricted some imports, raised social spending, and sped up the printing of money to pay for it.

“This behavior also tells us that the government will not be able to delay the devaluation long after the elections.”He wrote in a note Marcos Buscaglia, founder of the consulting firm Alberdi Partners, based in Buenos Aires.