President Javier Milei faces a formidable foe as he tries to contain a run on the peso ahead of crucial midterm elections: Argentina’s highly creative currency traders.
The South American country’s history of strict exchange controls and economic crises have spurred investors to develop myriad strategies to extract profit from government policies. Their voracious demand for dollars can be a thorn in the side of cash-strapped Argentine leaders.
Individual traders snapped up $9.5bn from Argentina’s central bank from April to August in order to sell them for more pesos on a parallel exchange market, according to a report by Buenos Aires’ publicly owned Banco Provincia, cited by local brokerage One618.
The purchases, equivalent to roughly half of the agricultural export dollars from Argentina’s harvest season, made it harder for the monetary authority to buy dollars to rebuild its scarce hard currency reserves without weakening the peso, which Milei was keen to avoid.
“In Argentina, anyone who understands the tricks of the market can make profits that don’t exist in other parts of the world, at the expense of draining the central bank,” said Salvador Vitelli, head of research at local financial consultancy Romano Group.
Milei’s failure to build reserves has unnerved investors in recent weeks and driven a sell off of Argentine assets.
The market turmoil began last month, when a bad local election loss cast doubt on support for Milei’s free market reforms, sending bond prices and the peso plummeting. That fuelled expectations that the government will soon have to devalue the peso from its current exchange rate band, compounding the sell off.
A vaguely worded pledge of financial support from US Treasury secretary Scott Bessent has tempered but not ended the volatility, with the peso climbing 10 per cent last week before falling 7 per cent this week.
Milei has blamed political enemies, who he says have sold pesos or encouraged others to do so. “They are willing to burn everything down to gain power,” he told local media on Wednesday.
But analysts said traders would also have less nefarious reasons to pressure the peso.
Dollar demand typically increases in Argentina ahead of elections, as individuals and businesses hedge against political risk. The trend has intensified since the 2019 surprise primary loss by conservative president Mauricio Macri to the leftwing Peronists, which wiped almost 40 per cent off Argentina’s stock market in a single day.
Demand for the dollar also rose last month when the political crisis weakened both the black market exchange rate and a legal parallel rate while the official peso was propped up by central bank intervention. The widening gap between the exchange rates encouraged arbitrage trades, known locally as “el rulo” (the roller).
That is among the simpler gambits Argentines have used to obtain the official exchange rate, to which access had been tightly restricted before Milei loosened the currency controls in April.
Companies may fabricate bills for overseas legal advice or IT services to access the cheaper exchange rate for importers. In the 2010s, there was a “trend of opening fake beach bars in Uruguay and bringing a pile of credit cards over to make payments on a card machine”, said Diego Fraga, an Argentine tax lawyer.
“The FX distortions give rise to many businesses, some legal, some not so legal,” he added.
Exchange policies are core to the work of Argentine traders. “Where in New York they might start the day by checking news wires, the first thing an Argentine trader checks is the central bank’s comms page,” said one local broker.
“It is very important to have a good legal department that can quickly interpret each new rule so you can quickly capitalise on the changes without incurring any fines,” he added.
Last Friday, Milei’s government reinstated a rule banning individuals who buy dollars in the official market from selling them on the parallel markets. Meanwhile, the central bank warned digital wallet apps, used by many Argentines for investing and making payments, to stop selling dollars at the official rate, saying they had misinterpreted existing rules.
The moves were designed to curb arbitrage, which swallowed up a large chunk of a $7bn influx of agricultural export dollars from stockpiled grains that the government drew into the market in recent weeks via a brief export tax holiday, as it battled to prop up the peso.
But analysts said Argentines are well-practised at finding ways around the rules. “You’ll have couples where one is buying the official dollar, and the other sells it on the parallel market,” Vitelli said.
Reintroducing restrictions also has side effects. Cutting a supply of official dollars to the parallel market has caused the parallel peso to weaken further, widening the gap with the official exchange rate to 5 per cent.
The wider the exchange rate gap, analysts say, the more Argentines are likely to do other things that strain the central bank’s reserves, like stepping up imports, which in effect become subsidised when there is a cheaper official rate.
“It’s a slippery slope,” said Juan Manuel Pazos, chief economist at One618. “Anything you restrict creates an arbitrage somewhere else and so you need to create more regulations to block that arbitrage, and the moment you block that arbitrage you create another one . . . you end up with 46mn people looking for ways to siphon reserves.”
Economists estimate the central bank has just a few billion dollars in liquid reserves that they can use to prop up the peso and defend its exchange rate band, with three weeks to go until the midterm elections.
Most said they expected authorities will sell whatever they can to avoid a damaging devaluation ahead of the polls, but that the government’s exchange rate policy must change after that.
In an attempt to calm markets, Milei told local radio on Wednesday that the government was “working on the details” of US support. Economy ministry officials are set to visit Washington this weekend, ahead of Milei’s own White House visit on October 14.
“We knew this could happen,” the president added of the market turmoil. “Now it’s a matter of getting through the hell that is this election year.”
