Argentina’s Central Bank sold US$678 million on Friday, taking its selling streak to three days since the exchange rate passed the upper limit of the banded float system on Wednesday.
It has now spent US$1.1 billion to prop up the peso, spending more each day. The monetary authority is trying to keep the exchange rate below AR$1,475.32, the current upper band. Friday marked the Central Bank’s ninth-highest daily sale since 2003.
Gross international reserves were US$39.2 billion on Friday, US$200 million less than Thursday.
The government of President Javier Milei is hoping to maintain forex and financial calm ahead of the October 26 mid-term elections. However, economists say the current rate of spending is unsustainable.
“What made the market most nervous was that the Treasury would sell dollars to curb the exchange rate with the same dollars it should be saving to pay its upcoming maturities,” said Pablo Lazzati, CEO of Insider Finance consultancy.
JPMorgan’s EMBI or country risk index, which calculates the possibility of default, exceeded 1,500 basis points. The dollar sold in informal and financial markets surpassed AR$1,500.
Independent financial analyst Gustavo Ber told the Herald that “dollarization is accelerating.”
“This pace of sales will be difficult to maintain until the elections,” Ber added. “As long as this search for coverage continues, traders will increasingly expect a change in the exchange rate regime.”
On Thursday, Economy Minister Luis Caputo told far-right streaming channel Carajo he would use Central Bank reserves to “sell down to the last dollar at the band’s ceiling” if necessary. He blamed a “political attack” for the run on the peso.
Argentina’s Congress, where Milei has previously been able to count on support from friendly opposition parties, has turned on him in recent votes, overturning presidential vetoes that would have clamped down on social spending.
Gustavo Quintana, an analyst and broker for PR Corredores, said it is “logical for the minister to make such a statement.”
“He has no other choice,” Quintana told the Herald. “Of course, he’s trying to reassure people that they have sufficient tools to defend the exchange rate. But Argentina has a long tradition in this regard. I think we need to be cautious and see how everything plays out.”
The government also tightened exchange controls on brokerages and individuals who hold certain jobs at financial institutions.
A report by the Argentine Center for Economic Policy (CEPA for its Spanish initials) said that “all macroeconomic indicators suggest the monetary and foreign exchange regime was transitional until the national elections on October 26.” However, it said, comments made by the national economic authorities appeared to link the national economic situation to the outcome of local elections in Buenos Aires province, where Peronism ultimately won by a margin of nearly 14 points.
This had the effect of bringing the market’s expected October reaction forward to September, “causing the financial market to bleed.”
Lazzati told the Herald that, in dealing desks, “the rumor circulating in the market is that, in addition to the US$3 billion to US$5 billion available for sale, there is a possibility that the US Treasury could add more funds to protect the plan.”
The same day, President Javier Milei said that his administration is “working very hard” in negotiations to get a loan from the US government.
“Until it is confirmed, we will not make any announcements,” the president added.
Lazzatti said that, on Friday, there was a strong growth in demand “due to the arbitrage available between the official dollar and the unlimited MEP” financial rate.