Where Is The Argentine Peso Headed?

Those of you who have U.S. dollars stashed away or make your living in a foreign currency may have been delighting at the peso’s decline in recent months. A weaker peso means your dollars go further when buying beef, Malbec or whatever else tickles your fancy. A 20 peso movie ticket on July 1 cost US $6.62 while today the same ticket goes for about $6.

Since early July the peso has dropped to 3.32 to the dollar from 3.02. The peso’s decline gained speed in early September, falling by around a centavo or so a day in relatively orderly fashion. The Argentine Central Bank, which oversees monetary policy and enforces the government’s exchange rate goals, was happy to let the peso slide slowly because it had lost competitive ground against neighboring currencies such as the Brazilian real. The weakening value of Brazil’s currency was particularly upsetting to many in Argentina’s manufacturing sector who feared that their products would become less attractive compared with similar goods from Brazil.

But then came an early Halloween treat: On October 21 President Cristina Fernández announced plans to nationalize Argentina’s 14-year-old private pension fund system. The news spooked investors, who started withdrawing cash from banks and exchanging it for dollars, which are deeply ingrained in the Argentine psyche as a safe haven investment in times of crisis.

This led the peso to drop at a faster rate until it hit about 3.38, according to Argentine Central Bank data. The peso hovered around that level for a few days until the Central Bank, the national tax agency (AFIP) and the national securities commission (CNV) started sending inspectors to leading banks and exchange houses. Before that, Central Bank agents had been pushing exchange houses to trade within certain “suggested” levels. But the monetary authority’s polite suggestions proved to be insufficient to keep the peso from spiraling downward. So the government curbed the capacity of banks and other exchange houses to trade freely.

One way it did this was to make sure bankers and traders felt the presence of federal inspectors breathing down their necks. Traders say this was tantamount to “persecution” and a not-so-veiled threat to cause tax problems for anyone caught trading at values considered unacceptable to the Central Bank. Central Bank officials say they simply have been enforcing the law.

Whatever the case, for these and other reasons too technical to get into here, the peso stopped bleeding value and returned to 3.30 on November 5. Since then the peso has barely moved. By Tuesday it had weakened to around 3.32 and it could continue to decline further, though probably very slowly, and probably not beyond 3.40 in the near-term. That seems to be the peso’s ceiling for at least for a little while, according to a general consensus of traders.

But most analysts think the peso eventually will start losing value again. For one thing, the global financial crisis is just beginning to sink its teeth into the global economy. The fallout from this, as well as the negative reaction to the pension fund grab and the generally unpredictable nature of Argentine economic policies, is likely to further feed fears about Argentina’s economic outlook. This, in turn, could continue to push anxious investors and average Argentines to keep exchanging their pesos for dollars. That will keep pressure on the peso, possibly forcing the Central Bank to use more of its reserves to defend the colorful currency.

Here is Goldman Sach’s gloss on the issue:

“We expect the (peso) to depreciate for two reasons. First, we believe the government will look to revive the weak currency policy pursued over the past six years, eventually reducing its intervention in the FX market and allowing the (peso) to weaken gradually in an effort to boost competitiveness and growth. Second, the government’s decision to seize the private pension funds has eroded confidence and led to bank deposit withdrawals and higher demand for Dollars. Unless confidence is restored, the latter trends are likely to continue, eventually leading to a depreciation of the (peso).”

Goldman sees the peso declining to 3.50 within three months, 3.70 within six, and 3.90 within a year.

It’s hard to know for sure where the peso will be in three months, much less in a year. And it should be noted that many – if not most – predictions of the peso’s decline have been inaccurate in recent years. But given the weaker value of the Brazilian real, slowing economic growth – including a possible recession, and a host of fiscal factors – including declining commodity prices and the impact of this on government revenue – there’s good reason to think the peso will depreciate in the months ahead. This could be especially true if inflation, which tends to worsen with a weaker peso, subsides as a problem.

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