World's Worst Currency Rebounds as Central Bank Overhauls Policy

(Bloomberg) -- Argentina’s peso rallied Monday after the central bank said it would step up intervention in the currency market -- the fourth change to policy in six weeks -- following last week’s market collapse.

The peso, the world’s worst performing currency this year, gained 3.6 percent to close Monday at 44.33 per dollar. The yield on government bonds maturing in 2021 dropped 126 basis points to 16.64 percent, after rising above 20 percent briefly on Thursday.

The central bank said it will start to sell dollars to stabilize the peso, overturning a previous pledge not to intervene if the currency remained within a limited trading band. The policy shift came after the currency hit a record low last week and bonds fell deep into distressed territory. Analysts expressed cautious support for the measures as the bank applies a whatever-it-takes approach to cool annual inflation running at 55 percent.

"It’s a bit uneasy the need to frequently adjust their strategy and increase firepower," said Daphne Wlasek, macro strategist at XP Investments in New York. But, "any measure to ensure the FX stability is positive."

World's Worst Currency Rebounds as Central Bank Overhauls Policy

The new measures follow a brutal week for Argentina bonds, with one yield rising to as high as 20 percent from 13 percent. The peso lost nearly 9 percent last week, driven mostly by a poll that showed market-friendly President Mauricio Macri could lose a runoff vote this November against his populist predecessor, Cristina Fernandez de Kirchner.

Changing Tack

The moves are “likely to have tested the patience of the IMF," said Edward Glossop, an economist at Capital Economics. The International Monetary Fund, which is managing a record $56 billion credit line for Argentina, issued a brief statement saying the measures were “well calibrated to the challenges” facing the country.

Central bank officials also said Monday that the upper band of the former non-intervention zone, set at 51.4 pesos to the dollar, would only serve in future as a barrier for increased intervention of $250 million a day, up from $150 million. The bank had $71.9 billion in foreign reserves as of Friday that it can tap to finance dollar sales.

Macri’s government is also pulling out all the stops to revive his approval rating and re-election chances amid Argentina’s second recession of his presidency. His ministers announced price controls and more small business loans 10 days ago. They also halted unpopular spending cuts on public transport.

Investor concern over Argentina’s debt load and deficits sparked a currency crisis last year. The peso lost 50 percent of its value against the U.S. dollar, inflation shot up by a similar amount and the central bank went through three presidents as it lost credibility.

Some analysts noted that Monday’s announcement effectively scrapped the non-intervention zone that the bank imposed last October with the IMF deal.

It’s "yet another major face lift of the under-pressure monetary plan," said Pablo Waldman, head of strategy at Argentine firm INTL FCStone. "It will now surely intervene forcefully to cool further inflationary pressures and stabilize the currency as the national election looms near."

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