Argentina peso ticks up, 500 per dollar black market rate still in play

(Reuters) - Argentina's peso strengthened in parallel markets on Wednesday, with the black market rate still not far from 500 per dollar and analysts were looking at the government's economic policy options and uncertainty building ahead of elections in October.

Calls for a devaluation that would send the 222 pesos per dollar official rate closer to the black market's 470 are not new. The government has worked around it for years and the proximity of the presidential election lowers the chances of a politically costly call. The black market peso ended 2022 at 342 per dollar.

Argentina's key parallel exchange rate, known as the dollar blue, was up for the first session in 12 with a 4.3% advance on Wednesday. The gap between the black and official rates remains above 100% after hitting Tuesday the widest in nine months.

"The overvalued currency erodes Argentina’s competitiveness in an already challenging context and points to a sharp deterioration in the current account position," said Olga Yangol, head of EM research & strategy at Credit Agricole (OTC:CRARY) CIB in a note.

"However, devaluation would lead to significant short-term pain as higher cost of imports would further exacerbate inflation."

Graphic: Argentina: peso gap - https://www.reuters.com/graphics/ARGENTINA-CURRENCY/byprlemwxpe/chart.png

Alberto Fernandez's administration could find it increasingly difficult to play it day-by-day until the October vote, with depleted central bank reserves and political turmoil heaping pressure on its currency.

"Undoubtedly, the central bank will have a rough time bolstering its coffers," Buenos-Aires based brokerage Portfolio Personal Inversiones wrote in a note.

Annualized inflation surpasses 100%, while the worst drought in six decades slashed exports adding pressure to already scarce dollar reserves. Capital controls have been in place since 2019.

"The Argentine government has not been able to do much to help with prices and there are no significant plans that can impress foreign investors," said Juan Perez, director of trading at Monex USA in Washington.

"Outrageous financial instability has become a common characteristic of Argentina’s calendar."

Graphic: Argentina: peso unpegged? - https://www.reuters.com/graphics/ARGENTINA-CURRENCY/mopakdwampa/chart.png

Consecutive International Monetary Fund programs have failed to anchor credibility, with the lender agreeing to soften economic policy targets without any reforms in exchange.

The current $44 billion program agreed in 2022 replaced a failed $57 billion loan from 2018. Economy Ministry officials will travel to Washington this week to start talks with IMF staff to recalibrate the program, but details were not yet available.