Deja Vu for Worst Emerging-Market Currency as Carry Trade Wavers

(Bloomberg) -- A slump in the Argentine peso revived memories of last year’s collapse, with falling interest rates and stubbornly high inflation leading investors to reverse carry trades.

The peso fell as much as 3.1 percent to 40.5 per dollar, the weakest level since Oct. 1. The currency has slumped for four days after the government reported that consumer prices rose more than expected in January, with many forecasting inflation will remain high until May.

The number came as a blow to investors who had poured money into the country to profit from high local interest-rates and a stable exchange rate this year. The faster-than-expected price growth, combined with a drop in the interest rate on 7-day Leliq notes in January and February, led many investors to reverse those carry trades in the past few days.

“Real interest-rates are now very low after the significant reduction in rates in the past few weeks,” said Joaquin Gonzalez Gale, a currency trader at INTL FCstone Argentina in Buenos Aires. “The January inflation number and the forecasts for February have highlighted the weakness in monetary policy.”

Low liquidity means it may take investors a while to unwind the carry trades. Moreover, with the peso still well within the central bank’s non-intervention zone, the bank is unlikely to intervene yet by pulling more pesos out of the market. The ceiling of the band for Wednesday is 49,693 pesos per dollar.

Gonzalez Gale said he expected the Leliq rate to continue rising.

Argentina’s peso, the worst performing emerging-market currency this year, had been trading stronger than a non-intervention band set by the central bank following a revised agreement with the International Monetary Fund.

©2019 Bloomberg L.P.