Well, it’s time to dust off the annotated Argentine peso chart, because amid the turmoil in emerging market currencies, the central bank has hiked rates (again).
Earlier this year, Argentina grabbed the limelight and not in a good way, as a crisis of confidence in the peso pushed the country into the arms of the IMF (again).
In the week through May 4, the central bank hiked a Tony Montana-ish 1275bps in an (ultimately futile) attempt to get a handle on things.
Paradoxically, the IMF program ended up being a negative for the currency as it effectively meant less intervention. Subsequently, the country got a welcome boost from the MSCI decision.
Anyway, it goes without saying that the collapse of the Turkish lira has soured sentiment further. On Monday, as the peso careened through 30, BCRA hiked another 500bps, taking the 7-day Leliq rate to 45%.
Here’s an up-to-date annotated chart:
The central bank also decided to wind down its short-term bill program in what’s being billed (get it?) as an attempt to rein in inflation and reduce FX volatility. As Bloomberg’s Davison Santana wrote on Monday afternoon citing traders, the “lack of market reaction” to the central bank’s efforts is “likely tied to the fact that short-term Lebacs have been negotiated at beyond 45% for more than a month [so] the central bank’s move [is being viewed] as a mere catch up with current market conditions.”
Generally speaking, it looks like analysts are willing to give policymakers the benefit of the doubt, even if the market isn’t overly impressed.
“[They] had to do something against contagion”, Nomura’s Siobhan Morden remarked.
Schroders’ Jim Barrineau praised Argentina for “doing all the right things”. He also juxtaposed today’s moves from BCRA with the Turkish central bank which, thanks to the fact that it’s basically being run by Berat Albayrak, is doing all the wrong things.
“Argentina’s policy mix can in no way be compared to Turkey’s refusal to embrace the measures that could swiftly bring its crisis to a close”, Barrineau said.
“Right” or not, it’s by no means clear this is going to matter. Sentiment around EM is souring in a hurry. At this point, central bankers in developing economies are effectively trying to outrun a thunderstorm in a car. That’s a race they’ll probably lose.
Is it a “coincidence” that the USDCNY has crept up to 6.89? If it were to go a bit higher and caused some minor shockwaves in equities, I guess Turkey could be the scapegoat for a “spillover”, as opposed to it being a deliberately manipulated shot in the US-China trade dispute. But I’m a n00b in these things.
Your comment that the IMF agreement limited the Argentine Central Bank’s ability to sell dollars is a good point, however I noticed that LaGarde and Macri+ team are planning to meet to increase ‘flexibility’ on this point. The new wrinkle here is the Notebooks scandal which is essentially a detailed compendium of bribes paid to the preceding Kirchner administration over a period of 12 years PRIOR to Macri being elected president. Business leaders were ‘forced’ to pay the Ks to win public works bidding on construction contracts. The emergence of the Notebooks as evidence has created an avanche of disclosures, and confessions, by business leaders ‘repenting’ their payoffs to the Ks. Markets are adding a new concern to the currency run…that a Petrobras/Car-Wash type ocean of disclosures will taint all politicians and paralyze the economy as they did in Brazil. The Turkey fiasco is the wrong kind of nervous backdrop at the wrong time. Argentine stock and bonds have been hammered…But perhaps unjustly. Shoot/sell first and ask questions later…is usually the best time to roll up your sleeves as an investor and get to work. I am optimistic that the Notebooks and Carwash scandals will differ. Whereas all Brazilian political parties were tarred by Carwash, the Notebooks have so far only fingered the ever more discredited Kirchner/‘Irrational’ wings of the Peronist Party in Argentina. Macri and his Cambiemos Party are so far emerging as ‘clean’…and the more practical/centrist figures in the Peronist Party are now MORE likely to cooperate with Macri’s government–and distance themselves from Senator Kirchner and her populist cohorts. The liklihood of a reasonable and reformist 2019 budget emerging that is market and IMF-friendly, over the next few months is therefore now also enhanced. The budget, showing sustainable tariff reform (fewer to no energy subsidies for consumers and business), reduced deficit spending, and freely traded foreign exchange are all part of the deal signed with the IMF (which you pointed out as far as currency intervention in your piece). Macri is doing the right things, and the IMF is actively supporting his government. In the short term anything can happen as global investors draw back and all emerging markets weather the storm, but it is in such details that fortunes are made, the ability to differentiate the wheat from the chaff, the truth from the fictional narratives making the rounds. Macri and Erdogan could not be more different.
Keep up the great work. I am pleased to be a new subscriber.