Home ForexArticles Inflation in Argentina and the widening of the exchange gap revive rumors about devaluation By Reuters

Inflation in Argentina and the widening of the exchange gap revive rumors about devaluation By Reuters

by SuperiorInvest

© Reuters. FILE PHOTO: A thousand Argentine peso bill sits on top of several hundred U.S. dollar bills in this illustrative photograph taken October 17, 2022. REUTERS/Agustin Marcarian/Illustration/File Photo

By Jorge Otaola

BUENOS AIRES (Reuters) – Argentina’s 211% inflation rate and return to a widening gap between official and parallel exchange rates are fueling expectations of another peso devaluation, just over a month after its dollar value would be reduced by half.

The South American country’s peso has been falling since the beginning of the year on the popular black market and other parallel markets, which for years have diverged sharply from the official exchange rate, which is underpinned by strict capital controls.

Dollars cost more than 1,200 pesos in parallel markets, compared to about 820 at the official exchange rate. This is a gap of almost 50%, which has doubled in recent weeks after narrowing drastically in December, when the government devalued the peso by more than 50%.

That expansion is stirring market expectations that the government of libertarian Javier Milei could soon devalue again, especially with monthly inflation above 25% in December, well above the 2% monthly rate that weakens the peso.

“If this rate of depreciation of the peso continues and there is no positive news about prices, expectations about a devaluation will increase,” said Pablo Besmedrisnik, director of the consulting firm Invenómica.

He added that it would make more sense to devalue before the key March-April harvest period for cash crops soybeans and corn, otherwise expectations of a devaluation would encourage producers to postpone exports, damaging state coffers.

‘WAKE UP TO ANOTHER DEVALUATION’

Inflation at its highest level in three decades, demand for dollars by importers and political uncertainties this year have weighed on the peso, which had gained ground in parallel markets following Milei’s devaluation after he took office. post.

“I wouldn’t be surprised if one of these days we wake up to another significant devaluation by the central bank,” said a veteran local currency trader who asked not to be identified, adding that the 2% monthly rolling parity was “unsustainable.”

A devaluation, he said, would encourage more exports and help reduce the fiscal deficit.

A central bank spokesman declined to comment.

Argentina has countless parallel exchange rates, popular because access to the official market is strictly limited. The “CCL” rate has weakened by 20% this year, the black market “blue” rate has lost 17%, while the official rate has dropped only 1.3%.

Argentina, which has a $44 billion program with the International Monetary Fund (IMF), has accumulated about $5 billion in foreign currency reserves this year, part of economic goals with the lender, helped by the higher official peso weak.

Agustín Etchebarne, director of the Libertad y Progreso Foundation, said the government would probably devalue again in February-March before the harvest. Argentina is the third largest exporter of corn and one of the main suppliers of processed soybeans.

“In my opinion, they have to get out of the exchange trap as soon as possible and have a true single and free exchange market, or dollarize,” he said, referring to a longer-term plan presented by Milei to adopt the dollar.

“It is clear that a 2% monthly devaluation with much higher inflation is not sustainable.”

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