Peso Faces Pressure as Investors Demand Higher Rates

Electoral uncertainty and a ruling by YPF increase demand for dollars.

Argentina’s peso is under renewed pressure, prompting investors to seek higher returns for holding the local currency. Escalating exchange risk perceptions have driven yields upward, although some moderation occurred towards the week’s end. The “carry trade” strategy’s sustainability is now in question.

Peso Volatility

Recent weeks have seen volatility in the peso curve, influenced by monetary scheme adjustments like the elimination of the Lefi. Treasury actions to absorb liquidity have further contributed to this instability.

Andrés Reschini of F2 Financial Solutions noted that electoral uncertainty and the YPF ruling have increased dollar demand, impacting the peso curve. We will have to see at what extent the returns become attractive enough for the market to stop looking at the dollar.

Central Bank’s Objectives

According to Reschini, maintaining yield levels is crucial for slowing the economy’s nominality and sustaining the “carry trade.” This strategy aims to maintain exchange calm and facilitate foreign exchange inflows via financial channels.

During the first half of the year, the “carry trade” was a winning approach. However, doubts persist about its viability in the second half, particularly given increased dollar demand and reduced incentives to hold pesos.

A June 25th tender marked a turning point when the Treasury only achieved a 58.8% rollover of its maturities, forcing it to validate rates above market, reaching 2.88% in the short section. This reflected market concerns and investors’ preference for short-term placements.

Economist Joel Lupieri explained, The cousin who ask you for coverage in the face of a weight drop to make the ‘carry trade’ is affecting the interest rate. The more risk there are that these weights cannot be converted into dollars, the greater the interest rate they will ask.

He added that maintaining positive real yields in peso instruments is key to holding the “carry trade” and preventing further dollar demand.

Concurrently, exchange rate fluctuations have become more prominent. Official and financial dollar rates have risen recently, continuing a trend from June. The exchange rate increased by $35 (3%) that month, increasing exchange risk perceptions and rate pressures.

Upcoming Government Tender

Amid this backdrop, the government has scheduled a new tender for Monday, with liquidation set for July 10th, coinciding with the Central Bank’s cessation of Lefi operations. Offerings will include letters and bonds in both pesos and dollars, focusing on short-term letters like S15G5 and S12S5.

Grupo SBS emphasized that the Lefi elimination will be a key factor, affecting banking fund transfers and potentially increasing real rates. As of July 5, 2024, Argentina’s country risk stood at 1,488 basis points, reflecting investor concerns about the country’s ability to meet its financial obligations (Trading Economics).

The coming week will be crucial for Argentina’s peso, as market participants closely monitor the government’s tender and the implications of the Lefi elimination on liquidity and rates.