Argentina is anticipated to ease its foreign exchange policy following this month’s midterm elections, as analysts and investors warn that the peso’s current trading band may not last much longer.
According to Reuters, the projected shift follows greater US financial support, which some fear may simply postpone further modifications to the troubled currency.
US backing tied to Milei’s political standing
The US was purchasing pesos, meanwhile, and is now creating a debt facility for Argentina, conditional on La Libertad Avanza, President Javier Milei’s party, performing well in the October 26 vote.
Also contingent on Milei’s continuation of his economic reforms, focused on drastic cuts in spending, deregulation, and free-market legislation, is Washington’s support.
Economy Minister Luis Caputo said an agreement on the terms of a $20 billion currency swap with the US central bank was near completion.
Although Caputo reaffirms the band system will remain, increased strain on the peso has driven most market players to see eventual policy change.
Institutional changes such as “winding the trading band for the currency until it’s hitting the bounds” will take time and “might be the way they need to head to,” one analyst said, further signifying the impracticality of the status quo.
US Treasury Secretary Scott Bessent said on Wednesday that the US had once again engaged in the open market to purchase pesos, following an initial declaration of support last week.
Market signals point to weakening confidence
Investors, however, remain sceptical that the government can sustain its exchange rate framework, despite repeated assurances from Caputo.
Forward contracts are now pricing in a breach of the band`s softer boundary, a sign of people being sceptical about the outcome for the peso in the short run.
That two-piece currency fell 1.7% to 1,378 per US dollar on Wednesday, providing another challenge for boundaries in the current regime.
Since Argentina agreed on a new $20 billion loan program with the International Monetary Fund in April, the peso has become 22% cheaper.
That trading band was part of an IMF promise to do away with years of tighter currency controls. It was aimed to be flexible, but not too volatile.
But the band is increasingly hard to maintain as global investors become increasingly cautious of widening deficits and high inflation biting Argentina.
Policy dilemmas deepen ahead of the vote
Milei’s administration needs to preserve stability before the election. Allowing the peso to depreciate too quickly might exacerbate inflation, which is currently among the highest in the area.
However, continuing to defend the currency risks depleting reserves and undermining the confidence of the overall reform plan.
Caputo has emphasised that US support will boost the central bank’s efforts, implying that Washington’s intervention is intended to provide breathing room rather than a long-term solution.
Analysts warn that once the election is finished, the government may be pushed to implement a weaker foreign exchange regulation.
According to Matthew Graves, portfolio manager in the emerging markets debt team at PPM America, “sticking with the band will necessitate a redesign.”
On the margin, investors would likely prefer a floating foreign exchange regime. It’s a simpler, long-lasting solution to what is essentially an external problem.”
A familiar struggle for Argentina
Argentina’s currency woes aren’t new.
The country has an almost cyclical history of balance-of-payments crises, often caused by a combination of large public expenditures, a structural trade deficit, and dependence on foreign borrowing.
Argentina defaulted on its sovereign debt in 2001, causing the peso to drop from the precipitous one-to-one peg it had with the dollar and igniting a deep economic crisis.
Again in 2014 and in 2020, the government defaulted on this debt, only worsening investor confidence and making it more difficult for the government to access international markets in the future.
As markets await the results of the October 26 elections, few anticipate a speedy remedy.
Even with US aid, the peso’s long-term stability will be determined by Milei’s administration’s ability to strike a compromise between political realities and the economic discipline required by investors and the IMF.
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