2018 has not been kind to Argentina.
In May, the country was forced (back) into the arms of the IMF amid a run on the currency. That marked a rather stunning fall from grace considering it was just a year ago when Argentina sold its infamous “century bond”, an issue brought to you by the same EM euphoria that came to an abrupt end this year amid Fed tightening and acute flareups tied to idiosyncratic, country-specific risk in places like Turkey and, well, Argentina.
You can trace this situation back as far as you want, but one thing that’s been variously cited is a poorly communicated December decision to up the inflation target and a couple of equally ill-advised policy rate cuts (in January).
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.
The collapse of the Turkish lira soured sentiment further this month and the peso careened through 30 on August 13, when BCRA hiked another 500bps, taking the 7-day rate to 45%. They also moved to wind down their short-term bill program in what was billed (get it?) as an attempt to rein in inflation and reduce FX volatility.
Here’s an annotated visual:
Well on Wednesday, things got materially worse as Macri implored the IMF to hurry up with disbursements. Argentina got $15 billion from the fund in June and was waiting for another $3 billion due next month.
Macri’s call didn’t do much to inspire confidence and when you’re dealing with an illiquid market and fragile sentiment, you end up with days like today.
That’s a two-day, but as you can see, the real plunge came on Wednesday, which ended up being the worst day for the currency since May, when the central bank stepped in and drew a line in the sand at 25 (see the yellow shaded box in the annotated chart above). It looks like they may have to do something like that again.
Whatever the case, this is obviously not great for the inflation outlook and it complicates things further for Macri. On the bright side, if the IMF was unconvinced that the disbursements needed to be sped up, the market’s reaction to Macri’s request ironically proves his point.