Argentina’s peso plunges

When I have written about monetary policy in Argentina I rarely have had anything positive to say. However, today I will have to say that the Argentine central bank made a sensible decision – even though it mostly looks like a coincidence.

This is from FT.com:

Argentina’s peso suffered its biggest one-day fall since the financial crisis of 2002 on Thursday, after the central bank stopped intervening in currency markets in an effort to preserve foreign exchange reserves that have fallen by almost a third over the past year.

The peso, whose long-running decline has accelerated since November, plunged 17.5 per cent to 8.1842 pesos to the dollar, according to Bloomberg data, although a lack of liquidity made it difficult to gauge its true level.

That is still at some distance from the black market rate that most Argentines use, which stood at around 12.85 to the dollar on Thursday.

Intervention and currency controls have kept the Argentine peso artificially strong for years – or rather the official peso rate has been much stronger than the real market rate – the black market rate. By allowing the peso to weaken today the peso at least has been allowed to move closer to the true market value. Hence, the market distortions have been reduced today. That is good news.
That said, the fact the peso as dropped so sharply today reflects an underlining problem – the total lack of nominal stability in Argentina. What policy makers in Argentina needs to do is of course as fast as possible to moved towards a rule-based monetary policy.
There are numerous options for providing nominal stability, but one thing is clear if the present polices are not changed fundamentally then the peso collapse is likely to continue.
…And as I was wrapping up this blog post the Argentine central bank is back! It is apparently intervening to strengthen the peso. Never expect central bankers to learn anything.
——–
See also my recent post on Cachanosky and Ravier’s proposal for a dollar-based Free Banking monetary reform in Argentina.
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3 Comments

  1. Lars,
    There is nothing that the BCRA hasn’t tried. Whatever you can think of, they have tried and always failed. That is because true CB independence is inconceivable to the government–even under a monetary board. Even another stab at dollarization won’t work, because it will just result in the government’s 50th default. Argentine monetary policy is like the Arab-Israeli peace process.

    Reply
  2. MarkC

     /  January 27, 2014

    Lars,

    On Friday, and continuing on the trend today, we see many emerging market currencies weaken while their yields go higher as UST rally. I see many pundits attributed it to the Argentinean peso devaluation and a potential of default of its debts. I find them a bit hard to believe, but apart from that I can’t offer any better explanation, what are your thoughts?

    Reply
  1. The sharply rising risk of Emerging Market policy blunders | The Market Monetarist

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