Argentina: Argentine peso depreciates sharply amid selloff of emerging market currencies
May 9, 2018
The Argentine peso (ARS), which has come under severe pressure since the end of April, depreciated to a multi-year low of 22.27 ARS per USD on 3 May. Volatility has persisted since then, and on 9 May the currency hit a new all-time low, trading at 22.70 ARS per USD. The result represented a steep 12.4% depreciation over the same day of the previous month and was also 46.3% weaker compared to the same day last year. In addition, it was 22.0% lower year-to-date.
The sharp depreciation partly reflects a broader trend among emerging economies, where faster-than-expected monetary tightening at the U.S. Federal Reserve is triggering a sell-off of emerging market currencies. In Argentina, however, the sell-off has been more pronounced. The country is more dependent on external financing due to rampant inflation that impedes its government from lowering fiscal spending and the wide twin deficits that makes it more vulnerable to external shocks. Market confidence has deteriorated rapidly and partly explains why the peso slid sharply despite a strong Central Bank intervention in which over USD 6.0 billion in international reserves were used. The Central Bank also hiked the 7-day repo reference rate from 27.25% on 27 April to 40.00% by 4 May.
Uncertainty and volatility are expected to become more pronounced in the forex market of many economies, including Argentina. The ARS is expected to continue weakening this year and next as uncertainty over the country’s ability to service its debt remains high along with political developments at home following the decision to request IMF assistance on 8 May. Analysts consider that for investor confidence to be restored in the economy and currency, Argentina will need to significantly trim fiscal spending to diminish its financing needs.
Argentine Peso Exchange Rate Forecast
Panelists surveyed for this month’s LatinFocus report expect the ARS to end 2018 at 21.62 ARS per USD. They project the Argentine peso will trade at 22.00 ARS per USD at the end of 2019.