Milei Stymies Wild Peso Swings as He Resets Argentine FX Policy

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(Bloomberg) — Every morning at the Argentine central bank, traders on its foreign exchange desk start with a simple mission: Keep the peso from moving too far up or down. 

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Most recently, they’ve been successful as the peso weakened by less than 1% in November, its smallest monthly move all year for the worst performer in emerging markets. It’s remained flat in December too. Instead of targeting a specific exchange rate, the traders aim to curb volatility day by day, trying to prevent selloffs just as much as sharp rallies, according to a person with direct knowledge of the matter. 

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Now the central bank’s FX desk is about to play a more prominent role as President Javier Milei seeks to accumulate reserves at the central bank, a task he’s postponed for his first two years in office. But it’s just one ingredient of a policy shift where the monetary authority will operate in and outside the market. 

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The aim is to stockpile reserves without lighting up investors’ computer screens with a wall of currency bids that would send the peso weaker and risk fanning inflation that’s cooled significantly and kept Milei’s popularity above his peers. 

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Starting next year, traders at Milei’s central bank will buy up to 5% of the daily trading volume in Argentina’s currency market. However, with volume hovering at low levels near $300 million a day and fluctuating rapidly, officials’ presence may be more felt in so-called block trades outside the market where the government buys dollars directly from institutions without throwing pesos into circulation.

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That dynamic was on display Monday when the Treasury purchased $320 million “off screen,” or outside the market, completely eclipsing all the trading volume inside Argentina’s currency market that day, according to central bank President Santiago Bausili. He added that the Treasury’s dollar purchases are related to Argentina’s upcoming bond payments of $4.5 billion in January. 

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Net dollar holdings in Argentina’s Treasury rose to $1.7 billion as of Dec. 12, official data show, driven by FX purchases and a local bond issuance. Including Monday’s purchase disclosed by Bausili would put the current stock near $2 billion, roughly half of what’s needed to cover January bond payments.

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“All of this is because they have to find a way to reconcile some control over the exchange rate with the need to buy dollars for the Treasury,” said Gabriel Caamaño, an economist at consulting firm Outlier.

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In a dual-currency economy like Argentina’s, where locals save in dollars but earn and spend in pesos, volatility is a big problem. It can erode demand for pesos, spark a flight to dollars and derail Milei’s push to crush inflation, now 31% annually, into single digits. 

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More analysts are warning Milei’s new policy pivot — while widely seen as positive — also risks fueling inflation. Besides accumulating more dollars in the market, and conversely selling pesos, the central bank will let the range the peso trades within expand at a faster pace, loosening its grip and thereby opening the door to more volatility that could spill over into prices.