The peso’s downfall could just be getting started

28th March 2019

By Miguel Angel Boggiano

The peso’s downfall could just be getting started

The calm that kept the dollar dormant until just a couple of weeks ago seems to be over. During 2019, the American currency appreciated against the Argentine Peso by over 16.5%, with a very strong rally in the last few days stoking fears of a currency crisis that could grow fast.

The sleeping beast seems to have awoken.

The rising price of a US dollar in Argentine pesos in recent weeks

The reasons behind the rise of the dollar are widely known, but it is important to take a closer look at some of them to understand how things could play out.

</p> <h2>Peso deposits</h2> <p>To start with, we have to take into consideration that with the elimination of the Central Bank peso-denominated LEBACs notes, the options for the retail investor have been reduced. This lack of alternatives, together with the rise in interest rates, explains the growth in the amount of pesos deposited in “plazo fijos” (fixed-term deposits) over the last few months.</p> <p>A similar rise has been observed in the amount of total deposits, a broader category including the aforementioned fixed-term deposits as well as inflation-adjusted fixed-term deposits (through the CER or UVA indexation mechanisms), savings accounts and others. Here, private sector deposits went from 1.5 trillion pesos to around 2 trillion in the second part of 2018, and are joined by an additional 750 billion pesos from the public sector.</p> <p>When looking at these figures, it is important to consider that the depositors of these pesos are keeping a close eye at what’s happening with the peso-to-the-dollar exchange rate.</p> <p>When the American currency starts to take off, a dynamic similar to that of a musical chairs game can be set into motion, causing a big flow to the dollar from investors who have positions in pesos. As soon as these investors fear that the other players could make their move out from the peso, causing a spike in the exchange rate by getting out ahead of them, a stampede to close those positions can rapidly develop.</p> <h2>Shifting debt</h2> <p>On the other hand, the Argentine Government has a new monetary problem. Even when it has announced its will to keep the amount of circulating pesos under control, the enormous issue of the Central Bank’s, peso-denominated LELIQ note (the new instrument that replaced the extinct LEBACs) represents a serious problem for the near future.</p> <p>Regarding the LELIQs, its stock has grown significantly, although it is worth to consider that its size as measured in US dollars is not as big as those reached by the LEBACs. In other words, they are a problem too, but not as huge as the one before.</p> <p>Treasury debt is another important issue that has only changed in shape: even when the stock of LETEs has been reduced, the stock of LECAPs has been growing sharply.</p> <p>The problem we have is that the Central Bank is running out of tools to control the exchange rate. Under Sturzenegger’s administration they tried to control the exchange rate through the rise in interest rates, but it did not work.</p> <p>Now, it is happening again. The Central Bank has hiked the reference interest rate up to almost 70% but it did not stop the rise of the dollar either.</p> <h2>Pressure will continue</h2> <p>In addition to this, it is worth to remember that according to official data, the Argentine Government will need up to US$ 31 billion to pay debt services and maturities during 2019. The IMF will provide only US$ 22.5 billion.</p> <p>All of this without taking into consideration additional demand for dollars from the local market (for savings, tourism, etc.).</p> <p>Finally, the regional context is adding even more pressure, as the Brazilian real is also falling strongly, breaking out from its previous range to reach 4 units per US dollar this week, its highest since October, a development which also favors the depreciation of the peso.</p> <p>It is, overall, a bad moment for Argentine assets, with the Galicia bank, its most liquid stock trading in US markets, showing signs of downward acceleration and the Bonar24, the country’s most liquid bond, also sharply moving down to US$ 92 and looking like it will most likely make a new low below 88.</p> <p>We should be prepared. The dollar rally is just getting started.</p> <p>

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Miguel Angel Boggiano

Miguel Boggiano is the founder and CEO of Carta Financiera and teaches Behavioral Finance at the University of San Andrés. He has an Economics Master’s from the University of Chicago and a public career in trading and financial analysis, with frequent appearances as guest specialist in Argentine print, TV and radio.