Government's multi-pronged strategy to contain the dollar at 1500 pesos

Argentina's government is intensely focused on preventing the dollar from breaching the 1500 peso mark, a critical barrier amid heightened local and international financial tension that has pushed the country risk index above 500 basis points. The wholesale dollar closed at 1495 pesos, having seen a significant jump in June. The government, led by Economy Minister Luis Caputo, views controlling the exchange rate as paramount to managing inflation and income.

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They are deploying a combined strategy, where the aim is to change the expectation about a possible additional devaluation. The dollar was allowed to run in May and July, with a nominal jump of around 8%, and since mid-July they have been keeping it stable around 1500 pesos.

"They are deploying a combined strategy, where the aim is to change the expectation about a possible additional devaluation," explained Fernando Baer, chief economist at Quantum Finanzas. "The dollar was allowed to run in May and July, with a nominal jump of around 8%, and since mid-July they have been keeping it stable around 1500 pesos." This strategy involves coordinated actions by the Ministry of Economy and the Central Bank (BCRA).

As pressure mounts on the exchange rate, investors are demanding a higher 'premium' for holding pesos. Despite falling inflation projections, peso interest rates have climbed. The benchmark interbank rate (Tamar) surpassed 22% annually in early July and now exceeds 24% nominal annual. Overnight repo rates have also shown volatility, closing above 28% recently. "As long as you have expectations about the dollar's value, and these pressures are not deactivated but repressed, directly or indirectly, to keep the exchange rate below 1500 pesos, the reason why many thought it should be worth more is not deactivated," said Gabriel Caamaño, head of Outlier. "This translates into the interest rate, because the investor ends up incorporating the risk of being in pesos and demands a higher return."

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As long as you have expectations about the dollar's value, and these pressures are not deactivated but repressed, directly or indirectly, to keep the exchange rate below 1500 pesos, the reason why many thought it should be worth more is not deactivated. This translates into the interest rate, because the investor ends up incorporating the risk of being in pesos and demands a higher return.

Market expectations, however, point to a continued rise in the dollar by year-end. The BCRA's latest survey of economists (REM) forecasts the exchange rate to reach 1652 pesos by December, an increase of about 9%. "Whenever a ceiling is placed on the exchange rate, sooner rather than later, the interest rate rises, because it incorporates that premium for being in a currency whose value is being contained," Caamaño added. "Everyone anticipates that between now and the end of the year there will be a slide, and they are moving against those expectations."

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Whenever a ceiling is placed on the exchange rate, sooner rather than later, the interest rate rises, because it incorporates that premium for being in a currency whose value is being contained. Everyone anticipates that between now and the end of the year there will be a slide, and they are moving against those expectations.