Argentina ain’t fuckin’ around when it comes to arresting the slide in the peso.
Headed into Friday, the central bank had hiked twice in less than a week, to no avail as the currency continued to careen lower in the worst rout since the December 2015 free float.
Well: Fuck. That.
… is what Argentina thinks, as clearly evidenced by this on Friday morning:
- ARGENTINA CENTRAL BANK RAISES KEY 7-DAY REPO RATE TO 40.00%
Argentina central bank: You call that a hike, this is a hike https://t.co/1rn1LSMYao
— ForexLive (@ForexLive) May 4, 2018
That’s right. They’ve now hiked by a truly Tony Montana-ish 1275bps since last Friday.
“That should be enough to deliver some pain to the traders who pushed ARS to 23 per dollar in the final minutes of trading yesterday,” Bloomberg’s Sebastian Boyd writes, adding that with “traders having called the bank’s bluff for the past 1 1/2 weeks, the central bank just went all-in.”
As a reminder, here’s what Goldman wrote on Thursday following the second intra-meeting hike:
The move reflects first and foremost continued intense ARS depreciation pressure despite steady FX spot market intervention and the 300bp hike on April 27. Furthermore, the rapid currency slide is adding further pressure on the already very complex and challenging inflation outlook. Overall, the two 300bp intra-meeting emergency rate hikes seem to respond more to financial market risk management considerations—rising risk of large capital account outflows—rather than growth-inflation considerations.
In the same note, Goldman suggested they resort to NDFs as they appear to be running down the ammo pretty fast. Here’s BofAML recounting how this played out:
A run against the peso started last week and the central bank sold a record $5.3bn to support the ARS in only nine days. The ARS has depreciated 10.4% in that period with a 5.2% move today. The run was initiated by foreign funds closing peso positions, especially Lebacs, which rapidly propagated to other investors and locals which triggered a large demand for peso hedges.
The pace of USD selling in the first week was unsustainable. Against this backdrop, BCRA changed its strategy releasing some pressure by letting the currency go, while it continued hiking rates. In this second week, BCRA let the ARS depreciate 8.9% to 22.38 (1.4% last week) and reduced FX intervention to about $500mn daily average from $1.2bn daily in April 25-27. The central bank sold $450mn today despite a 5.3% ARS depreciation (the largest daily depreciation since December 2015).
As noted on Thursday – and as the above-mentioned Boyd reiterates in his brief post – this was entirely avoidable. That December decision to up the inflation target was not well communicated and neither were subsequent policy rate cuts.
But you know, c’est la vie (that’s Spanish for “fuck it” for those of you who aren’t bilingual).
Alright, now who’s still betting on depreciation?