The Argentine Peso collapsed again today – plummeting below last week’s record low to 29/USD.

Desk chatter suggests that no one turned up this morning as the central bank announced it would increase its daily spot auctions to USD150mn on Thursday and Friday.

Despite continued efforts by the BCRA to sell USD on behalf of the Treasury, this intervention is unlikely to revert the trend, as Citi notes that the central bank has been left with a weak balance sheet to fight-off a speculative attack.

Argentine bank stocks are also plummeting…

Critically, as Daniel Lacalle recently wrote, the recent collapse of the Argentine Peso and other emerging currencies is more than a warning sign.

It could be the arrival of a “sudden stop”. As I explain in Escape from the Central Bank Trap (BEP, 2017), a sudden stop happens when the extraordinary and excessive flow of cheap US dollars into emerging markets suddenly reverses and funds return to the U.S. looking for safer assets. The central bank “carry trade” of low interest rates and abundant liquidity was used to buy “growth” and “inflation-linked” assets in emerging markets. As the evidence of a global slowdown adds to the rising rates in the U.S. and the Fed’s QT (quantitative tightening), emerging markets lose the tsunami of inflows and face massive outflows, because the bubble period was not used to strengthen those countries’ economies, but to perpetuate their imbalances.

The Argentine Peso, at the close of this article, lost 17% annualized is one of the most devalued currencies in 2018. More than the Lira of Turkey or the Ruble of Russia.

What explains this drop?

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