High Likelihood Of Another Devaluation

BMI View: We believe that the recent devaluation of the Argentine peso is insufficient to reduce the selling pressure on the official rate, meaning that the central bank will soon be forced to resume its policy of gradual weakening of the currency. Furthermore, we see substantial risk that neither the devaluation nor a return to the crawling peg will halt the loss of foreign currency reserves, an outcome that could force another devaluation of the peso in the next 12 months.

Despite the 17.7% devaluation of the Argentine peso during the week of January 20, we believe that the currency remains overvalued, and that further depreciation is unavoidable over the medium term. While allowing the peso to fall to a low of ARS8.243/US$ at one point on January 23 was in all likelihood intended to avert a larger currency crisis in the future, it appears that the sudden drop in the official rate will almost certainly lead to much higher inflation, exacerbating demand for foreign currency, maintaining downward pressure on the peso, and draining foreign currency reserves. As a result, we forecast that the central bank will resume its policy of gradually weakening the peso to try and manage some of this downward pressure over the short term. However, over the medium term, we believe that gradual weakening will prove increasingly insufficient to manage the pressure on the external account. Unless reserves are replenished, most likely due to some exogenous shock - say, the announcement of a massive hard currency loan from China or the speedy resolution of outstanding issues with the Paris Club, allowing a resolution of multilateral lending to Argentina - we see high likelihood that Argentina will devalue its currency again over the next 12 months.

Selling Pressure Still High On Official Rate

Still Massively Overvalued
Argentina - Official & Implied Exchange Rates, ARS/US$ & M2-to-Reserves Ratio

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Related sectors of this article: Economy, Finance, Forex, Exchange Rate Policy
Geography: Argentina, Argentina

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