ARGENTINA: Argentina: ARS Under Pressure - Negative

(ARGENT; Caa1/CCC/CCC+)

The currency is weakening and the market seems to be doubting the ability of authorities to support the ARS further as they already have a USD6bn futures position according to a source from Bloomberg, nearing a USD9bn regulatory cap, and also have acted like there is no need to intervene claiming liquidity is returning to the market. Leading up to the October midterms, markets will get more volatile.

Underlying these flows is concern about further volatility leading up to the October national legislative elections and then in the aftermath where the administration's reforms will likely be blocked due to lack of political support and then ultimately the country will not be able to access the international markets in 2026 as previously planned.

At this point, many positive reforms are already in motion with RIGI being the most positive longer term as it will allow the country to exploit valuable natural resources and earn hard currency.

As long as the government can hold the line on budget restraint and inflation they should be ok in the longer term, though reserves and the FX rate will still be a big concern in the shorter term. So far it appears that a weaker FX has not fed through to inflation as budget restraint and managing the money supply appeared to be working.

We posted earlier about government officials Caputo, Bausilli and Daza on a streaming channel to announce the intent to lower rates, maintain the same exchange rate policy and support bank operations regarding liquidity and reserve requirements:
https://www.mnimarkets.com/articles/argentina-economic-team-reacts-positive-1757683273953

Clearly there is a longer term goal of lowering rates and maintaining exchange rate policy which is positive but separate from what the market will allow.

The FX is close to the ceiling where the government and the IMF agreed they could intervene. Previously bullish calls from banks have been revised such as JP Morgan telling clients to implement hedges while keeping local bond exposure, according to Bloomberg.

Futures contracts are pricing in the wholesale exchange rate will reach USD1,605 by December, according to local news outlet Ambito. They also cite a market source that there was a USD300mn offer of dollars lurking and that it was thought to be the Central Bank preparing to intervene if the ARS breaches the upper end of the FX band.

ARGENT 35s were quoted 3 points lower today and down 13 points since June 30th while down about 12 points YTD.