Monetæ Pax

ARGENTINA - Report 04 Mar 2019 by Esteban Fernandez Medrano

​As usual, at this time of the year, Argentine politics and economic activity wake up from their summer lull. Friday's opening of the ordinary 2019 congressional session was the official kick-off. President Macri’s State of the Union address was a firm defense of his government’s achievements, despite acknowledging economic problems. It had a clear underlying electoral message ahead of the October presidential election, which promises to be extremely polarized.

But despite the summer tranquility, the market was not immune to the adverse indicators published in February. In particular, the inflation and activity indices were disappointing.

This disappointing news, combined with a partial reversion of the seasonal peso demand in December/January, triggered a moderate portfolio shift away from local currency into the dollar, which generated some peso depreciation. As the dollar rate left the floor of the flotation band, the monetary authority decided to support peso demand and thereby avoid further depreciation of the local currency by hiking interest rates again. While this strategy of Monetæ Pax (peace in the currency market) at the cost of hiking rates makes sense at a moment in which inflation expectations are being revised higher, it renews the concern about the ability of the BCRA to eventually cut rates fast enough to prevent the debt dynamic of the LELIQs from resembling that of the LEBACs too greatly.

In this report, we offer our political reading of the congressional opening session and analyze the recently published economic indicators and the latest BCRA debt dynamics.

Now read on...

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