Unstable Argentine peso is just what the central bank ordered

Bloomberg

Argentina’s peso is the world’s most volatile currency, and that’s fine with the central bank.
Big swings are usually not something policy makers want. Officials around the world have procedures in place to ward off the rapid ups and downs that make it difficult for businesses to plan and leave savers nervous about staying in the national currency.
But in Argentina, volatility is just what’s needed following a decade in which the price only moved one direction: a slow and steady weakening against the dollar. After President Mauricio Macri took office in December, devalued the peso and allowed free access to the market for the first time in four years, his central bank has been mostly hands-off. Policy makers want to quash any notion the trajectory is a foregone conclusion that should set expectations for inflation, estimated to be about 30 percent. “It’s a more challenging market than before, no doubt,” said Cristian Gardel, the chief executive officer of brokerage Pampa Trading SA in New York. “With the volatility now it’s way more interesting for traders.”

Argentina’s Peers
Argentina’s peers from Mexico to Peru are trying to fight currency turbulence after a wild start to the year for emerging markets. Latin American currencies, led by the Argentine peso, have swung more in the past 180 days than in any similar period since the global financial crisis of 2008 and 2009. Peru’s central bank, which has spent years trying to prop its currency up, last week polled traders about intervening to weaken the sol. Last month, Colombia shifted to a more sensitive trigger for intervention and Mexico sold dollars outright.
While the world’s biggest banks have reduced headcount in their currency trading departments by more than a quarter since 2010, in Argentina demand is soaring, according to Gardel, who says brokerages are particularly interested in traders for currency
futures.
Rising Volatility
The peso has gained 7 percent this month to 14.78 per dollar, as yields on central bank notes climbed to as high as 38 percent.
Three-month implied volatility, which gauges expectations of future price fluctuations, has more than doubled since Macri took office to 30 percent, the highest among about 40 currencies tracked worldwide by Bloomberg. During those swings, the central bank has intervened just a handful of times, turning its back on tightly managing the currency.
“We don’t want the price to be unidirectional, as it used to be,” Demian Reidel, a central bank board member, said in an interview with Argentine newspaper Clarin published on March 6. “We look to give it volatility.”
The central bank declined further comment on peso volatility.
Removing currency controls was one of Macri’s principal policy changes aimed at jump-starting growth and luring foreign investment into South America’s second-largest economy. In just three months in office, he has removed most export taxes, pared spending and reached a milestone settlement with holdout creditors left over from the country’s 2001 default.
Restrictions on buying dollars before Macri took office compelled Argentines to turn to unregulated markets where the peso was as much as 40 percent weaker than in official trading.

Tackling Inflation
Now, Macri’s government must tackle inflation. Policy makers are convinced that a key element to resetting expectations is challenging Argentine assumptions that the peso is always weakening and fueling price rises.
“For years, Argentines were used to a dollar that either stayed fixed or depreciated, which contributed to high inflation expectations,” said Ezequiel Aguirre, a currency strategist at Bank of America Corp. in New York. “In this new strategy, it’s no longer obvious if the peso weakens or strengthens. The volatility in both directions will help inflation expectations to detach themselves from the dollar.”