by Vincent Mivelaz
The strong sell off in emerging markets started in mid-April and continues to cause havoc in the marketplace.
The Argentinian central bank (BCRA) paid for it dearly, as it was forced to make use of all monetary tools at its disposal on three occasions last week following its first attempt in March to inject a total of more than $ 7 billion into the market since March, above 10% of its total foreign exchange holding estimated at USD 56.70 billion. After maintaining its 7-day repo rate at 27.25% during its April 11 meeting and unchanged for four months, the BCRA had no choice but to surprise the market and arrange emergency meetings to stabilise the situation, firmly increasing the interest rate by 12.75% to 40% within one week, a level not seen since September's 2016 rate hike at 38%.
Surely, the recent USD rally added to the uncertainty as to the number of Fed rate hikes in 2018 is capturing most of the attention, and not improving the Argentinian central banker’s affairs. Indeed, core inflation data from March were already given largely above BCRA's 15% inflation target for 2018, at 22.38%, and surely higher in April than initially estimated, suggesting that the current target probably remains too optimistic for now. In order to stabilise the situation, the Argentinian economy needs to gain back credibility towards the market. The strong increase in the short-term repo rate at 40% confirms its willingness to take the necessary steps to defend its home currency, a healthy reaction that most EM central banks would probably take as an ideal, particularly if US treasury yields upward pressures continue.
Rising by 19.30% against the greenback since the beginning of the year, the Argentinian peso is set for a gradual slowdown after a steep ascend since end-April. After recent surge at 22.40, we would expect the pair to go drastically lower, heading along the 21.25 range in the coming days.
Disclaimer: While every effort has been made to ensure that the datat quoted and used for the research behind this document is reliable, there is no guarantee that it is correct, and Swissquote Bank and its subsidiaries can accept no liability whatsoever in respect of any errors or omissions, or regarding the accuracy, completeness or reliability of the information contained herein. This document does not constitute a recommendation o sell and/or buy any financial products and is not to be considered as a solicitation and/or an offer to enter into any transaction. This document is a piece of economic research and is not intended to constitute investment advice, nor to solicit dealing in securities or in any other kind of investment.
Although every investment involves some degree of risk, the risk of loss trading off-exchange forex contracts can be substantial. Therefore if you are considering trading in this market, you should be aware of the risks associated with this product so you can make informed decisions prior to investing. The material presented here in not to be construed as trading advice or strategy. Swissquote Bank makes a strong effort to use reliable, expansive information, but we make no representation that it is accurate or complete. In addition, we have no obligation to notify you when opinions or data in this material change. Any prices stated in this report are for information purposes only and do not represent valuations for individual securities or other instruments.