Argentine $1.6 Billion Peso Defense Makes 27% Rates Tempting

(Bloomberg) -- Argentina’s central bank is boosting support for the peso, and bond traders smell an opportunity to profit.

The monetary authority has sold more than $1.6 billion of greenbacks in exchange markets this month, helping to slow down the rout that’s made the peso among the world’s worst performing currencies this year. Now that it’s stabilizing near 20.2 per dollar, bond traders are sensing an opportunity to profit from the country’s sky-high interest rates.

“We may see a second quarter with lower volatility in the currency and good peso returns,” said Pablo Albina, Schroders Plc’s head of Latin America fixed income in Buenos Aires. His funds have boosted their position in peso assets this month.

Global investors have long been tempted by Argentina’s highest-in-the-world interest rates -- the benchmark is currently 27.25 percent -- but those who bought into the local bond market in the past two years have been burned by the peso’s tumble, which virtually erased their returns in dollar terms. The trade would be more appealing if foreign buyers can count on the central bank to stem the rout that’s sent the currency down 8 percent this year.

Officials’ support for the peso is part of an effort to tamp down on stubbornly high inflation without boosting interest rates even further. The government eased the central bank’s inflation targets in December amid concerns that high rates were slowing an economic recovery.

Albina says he prefers inflation-linked bonds and local hybrid notes known as Bogatos. JPMorgan Chase & Co. upgraded its recommendation on fixed-rate peso bonds known as Botes to overweight on Thursday and suggested a long position in the peso.

“The heavy BCRA intervention should allow carry in rates to materialize, in our view, with the ARS performance now much more in line with” other emerging-market currencies, analysts at JPMorgan led by Carlos Carranza wrote.

Issuers are also taking notice and ready to tap into the new peso demand. The local unit of HSBC Holdings Plc and provinces including Rio Negro and Neuquen are seeking to raise capital in pesos, and together may seek as much as 14 billion pesos ($693 million) before July. That number could grow dramatically if the government, which has said it will only tap the local market to complete its 2018 financing needs, is followed by provinces like Buenos Aires and the city of Buenos Aires. Argentina still needs to raise about $7 billion of debt for its 2018 financial program.

The peso was little changed at 20.18 per dollar at 2:15 pm in New York on Friday.

©2018 Bloomberg L.P.

Bloomberg
Stay Updated With OnWeb News On BloombergQuint