Board approval: Milei alongside secretary general of the Presidency, Karina Milei, in the Argentine Congress in Buenos Aires. The new measures heed investor calls for a more flexible foreign exchange policy as analysts warn about an overvalued currency. — AFP
BUENOS AIRES: President Javier Milei’s government is unveiling changes to its currency policy and says it will embark on a campaign to build up its depleted foreign reserves, moving a step closer to the free float investors have long desired.
Beginning in 2026, the peso’s trading bands will expand at the same rate as monthly inflation, instead of the current 1% pace.
Prices rose 2.5% in November, meaning the bands could expand at more than double the existing pace in the near term.
The central bank will also start building up its reserves, aiming to buy US$10bil next year in a base case scenario, which could rise depending on monetary demand, according to a statement on Monday.
Initially, reserve purchases “will be aligned with” up to 5% of the daily volume in Argentina’s currency markets. The monetary authority may also purchase US dollars in block trades.
“Having successfully navigated the period of electoral uncertainty, conditions are now in place to advance into a new phase of the monetary programme,” the central bank said.
“This stage presents favourable conditions for growth, the re-monetisation of the economy and the accumulation of international reserves.”
Argentina’s sovereign bonds jumped across the curve on the news. Notes due in 2035, some of the most liquid, were up more than one US cent to almost 73 cents on the dollar.
The new measures heed investor calls for a more flexible foreign exchange policy as analysts had warned about an overvalued currency for much of Milei’s first two years in office.
They’re also the most significant policy changes since Argentina finalised its US$20bil agreement with the International Monetary Fund (IMF) in April.
IMF officials warned recently that it would be “challenging” for Argentina to meet the upcoming target in the programme for accumulating reserves, something that would require the lender’s board to approve another waiver. The government received a waiver earlier this year for missing the same target.
“It’s a positive step in the normalisation direction,” said Alejandro Cuadrado, global head of foreign exchange at BBVA, adding the peso could weaken somewhat as a result of the policy change.
The announcement was made after local markets closed, with the peso trading at 1,438.5 per US dollar.
Markets Live micro strategist Sebastian Boyd said: “The major beneficiaries of the reserve accumulation are likely to be the country’s dollar bonds, which bounced on the news.”
Milei is entering the second half of his mandate with renewed momentum after winning big in Argentina’s congressional midterm election in October.
A new Congress was sworn in last week, with Milei’s libertarians emerging as the largest bloc in the legislature, while he attempted to pass a major labour reform and annual budget.
Before the vote, Milei’s economic team had prioritised defending the peso and keeping inflation in check at the expense of not building up its reserves. Analysts saw the policy pivot as a welcome change that would likely boost bond prices.
“This looks like an acknowledgment that the current reserve accumulation strategy has been insufficient and they are trying to calibrate it to increase the pace of reserves accumulation,” said David Austerweil, deputy portfolio manager at Van Eck Global, calling it “credit positive”.
Reserve accumulation of “anywhere between US$10bil and US$15bil next year is very positive,” he added. — Bloomberg
