Tags: ARCURZ2 | ARECO | ARGENT | ARNEWS | ARS | ARTOP | ARTOPZ2

Argentine Peso Posts Fastest Drop in Three Months as Rates Sink

Tuesday, 20 May 2014 04:19 PM

May 20 (Bloomberg) -- The Argentine peso used to skirt currency controls through financial transactions is falling at the fastest pace since February as interest rates fail to compensate for inflation estimated at more than 30 percent.

The peso in the so-called blue-chip swap market has tumbled 10 percent to 10.8 per dollar since May 13, the biggest decline since the five sessions ended Feb. 4. The black market peso plunged 3.5 percent to 11.7 per dollar today, the weakest since Feb. 24, newspaper Ambito Financiero reported.

Local savers and investors are buying more dollars after central bank President Juan Carlos Fabrega cut rates from a decade-high 28.9 percent in March to 26.86 percent on 98-day notes to be issued at tonight’s auction. In addition to lower rates, fewer dollar inflows from exports add to pressure on the peso, according to Ezequiel Aguirre, a strategist at Bank of America Corp.

“If they cut interest rates and they don’t do a fiscal adjustment, inflation expectations rise and the peso starts getting overvalued,” Aguirre said in an e-mailed response to questions.

The peso in the official market, which is controlled by the central bank with almost daily intervention, weakened 0.1 percent to 8.06 per dollar at 3:22 p.m. New York time. It has declined 0.5 percent in the past week after the government kept the currency stable at about 8 per dollar for seven weeks.

Demand for securities used to exchange peso assets for dollar securities traded abroad in the blue-chip swap are driving gains in the benchmark stock index, Aguirre said.

The Merval has climbed 4.7 percent since May 13 to a record high and was up 0.6 percent today.

‘Vicious Cycle’

If the country’s parallel peso rates keep weakening faster than the official peso, Argentina will probably increase currency controls or accelerate the decline of the tender, according to Jose Alfredo Nogueira, the director of Buenos Aires-based ABC Mercado de Cambios.

The effect on those measures will only be temporary if the government doesn’t address inflation, the root cause of distrust in the currency, Nogueira said in a phone interview.

“Argentines are worried about the country’s economic situation so they seek protection in the dollar,” he said. “This will be a vicious cycle of controls and devaluation until the government realizes it needs to change its policies.”

To contact the reporter on this story: Camila Russo in Buenos Aires at crusso15@bloomberg.net To contact the editors responsible for this story: Brendan Walsh at bwalsh8@bloomberg.net Dennis Fitzgerald, Rita Nazareth

© Copyright 2017 Bloomberg News. All rights reserved.

   
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