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Friday, December 18, 2015

Argentina Peso Falls By As Much As 1/3 After Capital Controls Eliminated

December 17, 2015 7:34 pm

Argentine peso falls by almost a third as controls are lifted

Argentina's President Mauricio Macri dances on a balcony of the Casa Rosada government palace after the inauauguration ceremony in Buenos Aires©AFP
The Argentine peso fell by as much as 30 per cent against the dollar on Thursday after Mauricio Macro, the country’s newly elected president, lifted capital controlslate on Wednesday night.
But there was little sense of the market panic that followed the last devaluation in January 2014 when Mr Macri’s predecessor Cristina Fernández de Kirchner allowed the currency to devalue by 13 per cent in just 48 hours.
That is because unlike previous devaluations, the unwinding of capital controls was understood by the market as a key — albeit painful — part of Mr Macri’s plan to open and reform Argentina’s ailing economy.
“The market is very calm as the new rates make sense,” said Fernando Izzo, director at ABC Cambios, a wholesale foreign exchange brokerage. “There are no surprises for anyone.”
The move to undo what was popularly referred to as the “dollar clamp” is the biggest step taken yet by Mr Macri toward opening up Argentina’s economy since he was sworn-in as president on December 10.
The wholesale market closed at 13.4 pesos to the dollar, implying a devaluation of 27 per cent. The retail market closed at 14 pesos to the dollar, implying a devaluation of 30 per cent. But there were few operations, with most banks and foreign exchange houses not operating in the foreign currency market.
“This is a much smaller devaluation than what we were expecting,” said Alejo Costa, chief of research at Puente, a local brokerage. “It’s a reflection of just how optimistic the market is right now.”
Gustavo Quintana, a broker at PR Casa de Cambios, a local foreign exchange brokerage, said the true exchange rate against the dollar would not be know until next week. In the meantime, volatility would continue.
“Dollars came in but there were very few importers participating in the market because they have yet to adjust to the new rules,” he said. Some analysts say the peso still has room to fall.
The total amount traded was $129m compared to some $250m on an average day and the wholesale market was volatile, going as low as 11 pesos per dollar at one point.
The current rate actually puts the peso at a stronger footing than the 14.5 pesos per dollar level the currency was trading at in the black market the day before.
Bank of America Merrill Lynch cheered the move. Analysts at the bank raised the recommendation for the country’s bond investments to “overweight”.
“We expect a fast correction of external imbalances, after the recent FX [foreign exchange] announcements, and an agreement with the [creditor] holdouts by 3Q16,” said the bank, referring to a group of creditors who have been battling for full payment on Argentine bonds after rejecting debt restructurings.
One of Mr Macri’s challenge now is to make sure that the devaluation does not lead to a spiralling of already high inflation. To that end, finance minister Alfonso Prat-Gay has made clear that the central bank will be intervene if it thinks the peso is falling too much too fast in what he described as a “dirty float” system.