The Argentine peso (ARS) continued its freefall this week even as demand for the currency plunged. The USD/ARS pair surged to a record high of 900, much higher than January’s low of 350. It has risen by almost 2,000% in the past five years, a move that has seen Argentine’s purchasing power evaporate.
Argentina’s currency has plunged even as Javier Milei continues implementing his turnaround strategy. He has already achieved some of his campaign promises like lowering inflation. Monthly inflation has plunged from 25% in December to 9.2% in April and the trend could continue.
Annual inflation, on the other hand, has continued rising and now sits at 290%. This makes Argentina the worst emerging market in terms of inflation. Despite this, the central bank has delivered several for six meetings straight to 40%.
The implication of all this is that holders of Argentine debt are making a big loss because of the elevated inflation. In this case, the spread between inflation and interest rates stands at almost 250%, making the peso highly unattractive.
Milei has also passed his reform bill in the lower house and is being debated in the upper house. Some of the policies he passed had to do with deregulation of the economy and a one-year public emergency mandate allowing him to pass some policies by decree. It is unclear whether these policies will pass the upper house.
What is unclear, however, is that the future of the Argentine peso is in peril, which is in line with Milei’s campaign promise of dollarizing the economy.
The challenge for doing this is that Argentina does not have the funds needed to move completely to the US dollar. In the first place, it is one of the most indebted countries in the world, owing over $30 billion to the IMF. It would need over $30 billion to transition from the peso to the US dollar.
The other alternative is where the government lets the US dollar and the ARS compete with each other as we saw in Zimbabwe. In this case, the Argentine peso will continue plummeting while the demand for the greenback will rise.
All these scenarios are bearish for the Argentine peso. On top of that, there is no reform that will bring back confidence on the currency in the population. Besides, most people have already lost hope in the currency as its value has deteriorated.
Therefore, the outlook for the Argentine peso is extremely bearish, meaning that the USD/ARS will likely jump to the resistance level at 1,000.
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