Argentina’s peso is on its way to being overvalued, according to analysts from Bank of America Merrill Lynch. That is just a few months after the country contended with a financial crisis so severe that it walloped the peso and required a bailout from the International Monetary Fund.
Now, Argentina’s currency is too pricey, BAML strategists say.
downward spiral this past summer came on the back of a strengthening U.S. dollar, boosted in part by rising interest rates in the U.S., which in turn complicated matters for emerging markets with large dollar-denominated debt burdens, like Argentina. On top of that, the global trade dispute between the U.S. and China escalated, weighing on global growth expectations.
The peso hit its lowest level on record against the U.S. dollar in late September—less than 1 ½ months ago—reaching the peak of its currency crisis with one dollar buying 41.575 pesos. On the year, the currency has depreciated 47.5% against greenback, according to FactSet data.
But since then the peso has found its bearings and the dollar has dropped almost 15% against it, according to Dow Jones Data Group. Given this drastic retracing the Argentine currency no longer looked cheap, and was approaching overvalued territory, argued the BAML analysts, including Claudio Irigoyen.
“In fact, our compass FX model shows the Argentinian peso as the most overvalued emerging market currency as of Oct. 24,” they said, albeit, warning that the model had a two or three-year horizon.
Since the IMF intervened, Argentina’s economy, heavily reliant on foreign, particularly dollar-denominated, funding is showing signs of improvement. The country’s current accounts are looking healthier and its central bank, the Banco Central de la Republica Argentina, seems to have a handle on its macroeconomic situation.
In late October, the IMF approved a loan expansion to $56.3 billion from $50 billion before, and said Argentina had passed its first economic performance review.
With the peso exchange rate still sitting at the lower range of the trading band that was agreed with the IMF, “we expect BCRA to buy dollar up to $150 million per day to avoid it dropping substantially below the band,” the analysts said.
The trading band was established to stem the peso’s aggressive selloff.
“The IMF program is working in terms of FX stabilization amid a very tight monetary policy,” said Irigoyen & Co., referring to Argentina’s benchmark Leliq rate at 69%, “but it will rely more heavily on the recession, rather than exchange rates, to adjust external accounts.”
Argentina’s current account to imports ratio—called the absorption coefficient—is the highest among its Latin American peers, the BAML analysts said.
“This means that tradable goods absorption has to adjust by a higher percentage than in other countries in order to close the current account deficit, requiring a weaker exchange rate to achieve it,” the analysts said.
So, let’s see how the peso’s approach to overvaluation lasts.