Central Bank Is Last Man Standing in Argentina’s FX Market

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Central Bank Is Last Man Standing in Argentina's FX Market

(Bloomberg) — Argentina’s foreign exchange market almost ground to a halt this week as the peso hit new lows, with the central bank as the only player keeping it from complete paralysis.

On Sept. 4, the bank sold $358 million of the $650 million traded on the peso spot market, roughly 55 percent of the volume, as it sought to prop up the peso. Traders say it’s become essentially the only participant offering hard currency.

Read More: How Poor Communication Fed Argentine Peso’s Collapse: QuickTake

To put it into perspective, the last time Brazil’s central bank intervened in the FX market on Aug. 30, it sold $1.5 billion using derivatives in a session that saw total volume in that specific market of almost $38.9 billion. The intervention accounted for only 3.9 percent of the total.

The lack of liquidity in the peso also means that spreads on bid and offers have widened, further convincing traders to stay on the sidelines. The spread reached almost 3.5 pesos last week, the most in at least three months, based on data from the Buenos Aires MAE electronic trading platform. The peso gained for a second day Thursday, rising 1.3 percent as of 1:23 p.m. in Buenos Aires.

“The market is operating with very low volume, without the hysteria of the previous days, but with too few trades to be considered representative,” said Gustavo Quintana, a currency trader at PR Corredores de Cambio in Buenos Aires.Traded volume has slumped as the peso tumbled 51 percent in the year to date. A rout that began in April intensified last week after President Mauricio Macri said he was looking to speed up disbursements from a $50 billion credit line with the International Monetary Fund. The announcement, combined with accelerating inflation and the prospect of a recession this year, spooked investors and led to a 16 percent drop in the peso last week alone.

The central bank Wednesday sold dollars directly in the market in addition to a $100 million intervention through an auction.

“Liquidity is improving slightly, but on Tuesday it could have been considered a broken market with scarce activity in the month,” said Alejandro Cuadrado, Latin America FX strategist at BBVA (MC:BBVA) in New York. “The conclusion is that it’s too early to say that it has stabilized.”

So what’s next for the Argentine peso? Investors are watching for clues from negotiations in Washington D.C., where government and central bank representatives are meeting with IMF Director Christine Lagarde and her team to revise the original agreement. That will be the next catalyst to help anchor short-term expectations for the peso, Cuadrado said.

“From then on we can talk about rebuilding the market and reducing volatility,” Cuadrado added. “But it’s hard to see flows returning significantly. Appetite on dollar-bonds is trickling in, but appetite for the ARS will remain limited.”

(Updates to add trader quote, peso trading.)

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