FX.co ★ Argentine Peso Back On the Defensive

The Argentine peso has depreciated beyond 1,450 per US dollar, approaching its record low of 1,475 observed on September 19th. This decline follows a temporary recovery, as political and policy uncertainties leading up to the October 26th midterm elections, coupled with skepticism regarding the magnitude and immediacy of US support, have resulted in significant foreign exchange outflows. This environment has prompted a reassessment of devaluation risks and increased demand for forward protection. Initially, markets responded positively to discussions surrounding a $20 billion swap framework; however, the lack of clarity regarding the timing and conditions for its activation, along with inconsistent public statements from Washington and a notable warning that US assistance might be tied to the election's outcome, have eroded this optimism. Despite limited efforts by the Treasury to purchase pesos, the official exchange rate and short-term forward contracts have significantly decreased. This shift is indicative of the hedging and funding pressures faced by banks and corporations. In light of a precarious reserve position and substantial near-term external obligations, traders are now anticipating a higher likelihood of a policy change following the election.