Argentina’s peso plunges in warning light for Milei

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Argentina’s peso plunged on the black market this week after months of stability, creating a potential stumbling block for libertarian president Javier Milei’s plans to remove currency controls.

The peso has fallen more than 15 per cent against the dollar over the last week to a record low of 1,300 on the black market, where Argentines go to sell their chronically depreciating pesos.

The fall was the fastest in a seven-day period since a volatile period shortly after Milei took office in December.

Analysts said the volatility was largely the result of increasingly aggressive interest rate cuts by Argentina’s central bank, which has slashed the benchmark rate from 70 per cent to 40 per cent in just over a month.

The cuts are central to Milei’s highly technical strategy for putting an end to money printing — the root cause of Argentina’s chronic inflation. The annual rate hit 289 per cent in April.

On a parallel financial market used by traders and some businesses, the peso has fallen 12 per cent in a week to a near record low of 1247 pesos per dollar, with losses levelling off on Thursday. 

The steep fall in Argentina’s currency means that the gap between the parallel rates and the official exchange rate, currently 873 pesos to the dollar, has widened to almost 40 per cent.

Milei has made lifting Argentina’s strict currency controls a key target of his economic program as they are a major drag on economic growth. But he can only do this if the gap is narrow.

The president revived his headline campaign pledge this week to do away with the Argentine currency altogether and replace it with the US dollar, telling business leaders on Tuesday that he would soon allow “competition” between the peso and the dollar.

“The peso will become like a museum piece and when it becomes very rare, what do you think we will do?” he said. “We will dollarise and that way the peso will disappear.”

Argentina’s rate cuts have discouraged individuals and companies from holding peso instruments, boosting demand for dollars to shield them from inflation.

The turbulence shows the delicate balance economy minister Luis Caputo must strike to solve Argentina’s long running crisis, said Ramiro Blazquez Giomi, BancTrust’s head of research and strategy. 

“Caputo has been deliberately testing the market by cutting rates so fast [to see how robust demand for pesos was],” he said. “This shows the limits of the economic plan: we can only advance towards lifting currency controls if we have measures that bring more dollars [into Argentina’s central bank], or there will be a run on the peso.”

Milei has said he is seeking to borrow up to $15bn from external creditors, including the IMF, to support his plan to lift currency controls.

Caputo has resisted pressure from Argentina’s business sector to speed up his slow motion devaluation of the peso’s government-controlled official exchange rate. He is cutting its value by 2 per cent a month against the dollar, despite monthly inflation four times that. Big official devaluations tend to fuel inflation in Argentina.

Fernando Marull, founder of finance consultancy FMyA, said the peso’s fall was “a yellow warning light” for that plan. The gap between the official and black market rate, while currently large, has been even bigger under previous governments.

“They will wait to see if the market rebalances itself, and there are reasons to believe that will happen,” he said. “An exchange rate gap of 40 per cent won’t change the plan — one wider than that is another story.”