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Argentina decides to sell dollars to stop the peso devaluation

O Central Bank of Argentina decided to intervene as of Monday in full in the currency market to defend the Weight and contain a currency swap with the endorsement of the IMF six months before the October presidential election.

From now on, the bank could sell up to 250 million dollars a day to satisfy market demand, even if the exchange rate is below 51.54 pesos per dollar, which is the ceiling of a band without intervention whose floor is 39.75 and was agreed with the International Monetary Fund (IMF).

After a volatile week in which the peso lost 8.16% against the dollar, the announcement received the immediate support of the IMF that last year gave Argentina a credit line of 56 billion dollars conditioned to the correction of its policies. "We support these measures, which are adequately calibrated to the challenges facing Argentina," the IMF said.

The measure was well received in the foreign exchange market that opened with the price of the peso rising to 46.50 and closed at 45.60 pesos against the 46.80 pesos at the close of Friday. To contain last week's volatility, the Central Bank raised the base interest rate to 72%. International reserves ended on Friday at $ 71.898 billion.

This is the second unorthodox measure taken in recent weeks by President Mauricio Macri, who had already announced the freezing of commodity prices and utility tariffs in an attempt to ease the inflationary pace.

"Given the increase in exchange rate volatility … the Central Bank should reinforce the contractionary bias of monetary policy by intervening in the foreign exchange market to reduce the amount of pesos more aggressively," the entity said.

"Anchor Expectations"

Economist Matías Carugati told AFP that "in the middle of the emergency is a precise measure that can work, and I say" can "because there are no certainties".

In his opinion, the Central Bank "will let the exchange rate move as freely as possible, but try to reduce volatility."

"All analysts understand that the exchange rate tends to rise to keep up with inflation, the problem is when the increase is given by jumps. This measure tries to anchor expectations," he explained.

According to the new provision, if the exchange rate is above 51.44 pesos "the Central Bank will increase from $ 150 to $ 250 million the amount of daily sales stipulated so far," the agency said.

However, such interventions can also be performed when the quote is located within the range of currency fluctuation in certain circumstances.

"Argentina is facing a challenging situation in the financial markets," IMF Deputy Director David Lipton said in a statement.

In the statement, the senior official also noted that "executive directors have expressed their support for the structure supporting the Stand-By Arrangement and the implementation of these policies by the government."

Inflation vs. wishes

The government of Mauricio Macri considers that the depreciation of the peso is the main inflationary factor.

In March, Argentina registered inflation of 4.7% and accumulated 11.8% in the first quarter. The year-on-year rate was 54.7%.
The economic crisis and rising prices are among Argentina's biggest concerns, which will go to the polls in October to elect the president.

Although the nominations have not yet been formalized, Macri lost in the polls at the same time as his predecessor Cristina Kirchner, of center-left Peronism.

"The weakness of the economy could further affect President Macri's approval ratings and increase the chances of his predecessor, the populist Cristina Fernández de Kirchner," Capital Economics said.

In highlighting Kirchner's "anti-IMF" character, Capital Economics considered that its advance in voting will have an even greater impact on the economy, with the risk of further weakening.

Numerous unions called for a strike Tuesday with the mobilization to the Plaza de Mayo in rejection of the economic policy of the Macri government.


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