Argentina scrapped some of its currency controls a day after devaluing the Argentine peso as policymakers sought to stem a financial crisis and restore investor confidence by reversing measures that drove foreign reserves to a seven-year low.
Bonds fell, and the cost to insure Argentina’s debt against default soared to a three-month high, as traders bet the move would backfire and lead to further dollar outflows.
The Argentine peso dropped 1.5 percent to 8.0014 per US dollar at 3:34pm on Friday in Buenos Aires, extending its plunge last week to 15 percent, the worst sell-off since a devaluation that followed the country’s record sovereign default in 2001.
The currency market overhaul is the latest and boldest measure tried by Argentine President Cristina Fernandez as she seeks to win back investors, regain access to international debt markets, shore up a faltering economy and curb inflation that soared to 28 percent last year. The increase to 23.8 percent in the annual cost to protect the nation’s debt against default makes it the most expensive in the world.
The easing of controls is an attempt to stem panic among Argentines, said Siobhan Morden, head of Latin America fixed income strategy at Jefferies Group LLC.
“They are hoping it creates less panicky demand for [US] dollars,” she said.
Morden said the country needs to implement additional measures such as curbing money supply growth to make the foreign-exchange policy changes effective.
“Markets will give them a day or two,” she said.
“But if there’s no follow-up, the prices trade lower again,” she added.
The Argentine peso’s plunge formed part of an emerging-market currency rout last week that was triggered in part by a deepening of the political and financial crises in Turkey and Ukraine.
The lira sank 4.1 percent during the week while Russia’s ruble dropped 2.9 percent and South Africa’s rand weakened beyond 11 per US dollar for the first time since 2008.
In Brazil, the real slumped 2.6 percent to a five-month low on concern that the Argentine peso devaluation will erode demand for the country’s goods
Additionally, Argentina’s central bank increased interest rates on notes to be auctioned on Tuesday. The monetary authority will offer a fixed rate of 25.89 percent on Argentine peso-denominated notes due in 98 days, a 6 percentage point increase from the rate offered last week, it said in an e-mailed statement. The bank is also offering US dollar-denominated notes to yield between 2.5 percent and 4 percent to financial entities holding foreign-currency deposits.
Argentina began devaluing its peso on Wednesday, allowing it to fall the most since 2002, in a bid to stem a financial crisis and a drain in foreign reserves amid annual inflation running at an estimated at 28.4 percent.
“It’s a step in the right direction, although the amount is not enough,” wrote Ezequiel Aguirre, a strategist at Bank of America Corp, in an e-mailed response to questions.
“Real interest rates are still negative,” he added.
Policymakers should allow the so-called badlar rate, which banks pay for 30-day deposits of more than 1 million Argentine pesos to double to 40 percent while the peso slides to 9 per US dollar in order to stabilize demand for pesos, Aguirre said.