For the second time in a week, Argentina’s Central Bank has hiked its key rate 300bps today (300bps on 4/27) to 33.25% for 7-Day repo in an attempt to stall the currency’s freefall… for now it’s not working!
Today’s actions follows yesterday’s collapse, as we detailed here, as Morgan Stanley analysts led by Fernando Sedano wrote in note:
“Both domestic and external factors are likely to test Argentine assets again, keeping volatility and risk premia high,”
“Because Argentina has used almost two-thirds of the FX reserves acquired this year, we think any eventual FX volatility may have to dealt with via further hikes”
Additionaly, Nomura said in a note yesterday that:
“traders will need further signs from the Macri administration and from the central bank that there’s commitment to lowering inflation and narrowing the deficit…
it’s important officials aren’t tempted with pro-growth policies like in December/January. “
And, despite the rate-hike today – seemingly reaffirming this commitment to battle a plunge into hyperinflation, as Bloomberg reports today, Argentina’s central bank (BCRA) seems cornered between a rush for dollars and a fragile economy, as spot sales and surprise rate hikes fail to arrest the peso’s depreciation and may lead officials to eye a different angle.
“Eventually, the central bank might decide to intervene in the onshore NDF (Rofex) as well,” said Daniel Chodos, a strategist at Credit Suisse in Buenos Aires.
Critically, Chodos says that such a move would undermine credibility, given that a free market was one of the main planks of Macri’s government.
“The BCRA can combine all its instruments to stabilize the exchange rate market, but it is appropriate that it does not lean too much against external volatility,” Mauro Roca, managing director for emerging markets sovereign research at TCW Group in Los Angeles, said yesterday.
The problem, as Bloomberg notes, is that BCRA no longer fighting against global trend.
The Argentine Peso is the worst EMFX currency today by a significant distance.