May 7, 2018 / 5:15 AM / 20 days ago

Argentina peso closes down slightly despite rate hike

BUENOS AIRES (Reuters) - Argentina’s peso closed slightly weaker on Monday, though analysts remained optimistic the government and central bank had curbed a run on the currency with a massive rate hike and lower fiscal deficit target last week.

Argentine Treasury Minister Nicolas Dujovne speaks next to Argentine Finance Minister Luis Caputo during a news conference in Buenos Aires, Argentina May 4, 2018. REUTERS/Marcos Brindicci

The local currency opened stronger on Monday but closed down 0.41 percent, at 21.97 per U.S. dollar. The Merval stock index .MERV ended down 3.43 percent and traders said investors remained cautious.

Last week, the peso hit an all-time low of 23 per greenback, prompting the government to announce additional fiscal belt tightening and the central bank to hike its key interest rate to 40 percent on Friday. The peso closed up 5 percent on Friday but was still down 15 percent for the year.

The peso’s slump made Argentines nervous. Many still have strong memories of a 2001 bank run that led to years of hyperinflation, political instability and poverty.

“The peso may strengthen or weaken ... the idea is that there be little volatility,” Treasury Minister Nicolas Dujovne said on local television on Sunday night, reminding Argentines that the peso is a free-floating currency.

The 40 percent rate “can temporarily support an exchange rate of 21.6, but the heavy positioning, loss of credibility, and reputational cost make 22 [pesos] a new fair rate in our view,” BTG Pactual economists said in a note.

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The bank forecast an exchange rate of 24 per dollar for the year-end and raised its annual inflation forecast to 24 percent - far higher than the central bank’s target of 15 percent.

The issue of credibility is crucial to Argentina, which returned to international capital markets after settling a dispute with holdout creditors after center-right President Mauricio Macri took office in late 2015, ending 12 years of leftist governments.

Argentina even sold an oversubscribed century bond AR163761602= last year to investors who had praised his policies. Latin America’s No. 3 economy still lacks an investor credit rating and is classified as a frontier rather than an emerging market by Morgan Stanley.

Marco Lavagna, an opposition congressman from a moderate Peronist party, tweeted on Monday that the expected approval on Wednesday of a long-awaited capital markets reform could also help calm markets. Its passage is seen as an important step to attracting more investment and achieving emerging market status.

    Portfolio Personal consultancy said investors would likely remain cautious in the near term. “Potential rebounds may be an exit opportunity for those who do not feel comfortable in a market that will not be clear in the near term,” it said in a report.

    ‘EXCESSIVE FINANCING COSTS’

    The central bank, which is not technically independent from the government, had lowered rates earlier in the year, arguing inflation would start falling in May when a series of government mandated price hikes on energy and transportation were scheduled to end. But higher rates abroad and an exodus from emerging markets last week appeared to have caught it off guard.

    Dujovne said on Sunday that inflation in May would be lower than 2 percent.

    Before announcing three emergency rate hikes starting on April 27, the central bank tried to prop up the peso by selling nearly $8 billion in dollar reserves on the spot market since March. Traders said the bank had not intervened on Monday.

    The central bank’s board has a scheduled twice-a-month meeting on Tuesday.

    “While the interest rate will fall below the current levels, it is likely to do so slowly,” said Camilo Tiscornia, head of C&T consultancy, anticipating annual inflation between 20 and 25 percent.

    Additional reporting by Hugh Bronstein, Walter Bianchi and Miguel Lobianco; Editing by Phil Berlowitz and Leslie Adler

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