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Peso, Rand Plummet As Emerging Market Crisis Deepens

The EM contagion is slamming currencies around the globe, and while the Turkish Lira remains relatively immune for the time being, traders are now focusing their attention on the South African rand and the Argentine peso, both of which are in freefall this morning.

The ZAR has plunged 3.2%, the most since Nov. 10, 2016 on a closing basis, after the country reported that it had unexpected slumped into recession, which in turn is reigniting concerns about a rating agency downgrade. At the same time, the yield on rand-denominated government bonds has jumped 24bps to 9.24%, the highest since Dec. 1.

The Argentine peso is the other EM currency in freefall this morning, dropping 5.5% to 39 per dollar (vs the Friday close dueo the Monday US holiday) when the market opened in Buenos Aires Tuesday following a new series of measures announced by the government on Monday, including new export tariffs to help close fiscal gap by 2019, a move which the market clearly finds insufficient.

As Bloomberg notes, NY-traded shares of Argentine companies opened down, with the Bank of New York Mellon Argentina ADR Index dropping 4.4 percent at the open. Bank stocks led declines with drops of as much as 13 percent.

Peso Set To Disintegrate After IMF Tells Argentina To Stop Supporting Currency

On May 11, three days after Argentina secured a $50 Billion IMF bailout – the largest in the fund’s history – we jokingly noted that with the peso resuming its slide, an indication the market did not view the IMF backstop as credible, the ECB would need to get involved.

Time to add ECB to IMF bailout

In retrospect, it now appears that this may not have been a joke, because with the Peso plummeting, and surpassing the Turkish Lira as the worst performing currency of 2018 having lost half its value YTD…

… with the bulk of the collapse taking place in August…

… Christone Lagarde had some very bad news for Buenos Aires and Argentina president Mauricio Macri: the IMF now insists that after burning through billions in central bank reserves, Argentina should stop using funds to support the peso, and float it freely.

According to Infobae, the Argentine foreign currency reserves have declined below the level demanded by the IMF, with Argentine authorities selling $2.5BN to support the peso in August; meanwhile the overall level of reserves has slumped even more, approaching the levels before the IMF bailout and failing to prop up the peso which, as shown below, has collapsed in a move reminiscent of what is taking place in hyperinflating Venezuela.

Worse, the Argentine Peso suffered its latest sharp drop in the days after the central bank unexpectedly hiked rates to 60% – the highest in the world – and another indication that the market is firmly convinced that not even the IMF backstop will force Argentina into a painful, and politically destabilizing structural program.

…click on the above link to read the rest of the article…

In Argentina “All Bets Are Off” As Peso Disintegrates

“All bets are off” in Argentina” – as Bloomberg puts it – where the value of the local peso has plummeted, falling 20% this week alone. It is now 50$ weaker on the year versus the USD, making it the worst performing currency of 2018 and sending massive shockwaves through Argentina’s economy. The effect on business owners and anyone who transacts in local currency has been profound, according to Bloomberg.

“There’s no clear price reference after the peso plunge,” one business owner told Bloomberg. The price plunge has created havoc for him and his surgical equipment business, where he buys in foreign currencies and sells in pesos.

Unlike hyperinflating economic basket case Venezuela, Argentina is a sizable $640 billion economy that is now being put to the test to see how much strain it can truly endure.

The peso crippling could also be a precursor to political unrest, as President Mauricio Macri’s chances of being reelected are reportedly falling, despite being known as a leader who has been friendly to the markets over the course of his tenure. However, as a result of the recent turmoil, he’s “struggling” to restore investor confidence in the Argentinian peso.

Argentina and its Central Bank have taken a number of decisive steps to try and halt the plunge, yesterday hiking interest rates to the world’s highest 60%. Previously, the country had requested quicker payouts from the International Monetary Fund, which promptly granted the collapsing country’s request.

And speaking of Argentina $50 billion loan agreement in place with the IMF – the largest ever in IMF history – this isn’t that too different from the country’s 2001 default, when it was on a similar IMF loan program. Since then, the country underwent a “decade of budget-busting left-populist government – and isolation from world financial markets”.

The result appears to be the country coming full circle.

…click on the above link to read the rest of the article…

Weekly Commentary: Turkey (Nudged Over the Cliff)

Weekly Commentary: Turkey (Nudged Over the Cliff)

The Turkish lira sank 13.7% in chaotic Friday trading. The lira’s 21.0% “worst week in 17 years” collapse pushed y-t-d losses to 41.1%. Turkish 10-year yields spiked to almost 21%, before retreating somewhat. After beginning the year at 155, Turkey sovereign credit default swaps (CDS) spiked 166 bps during Friday trading (up 199 bps for the week) to 437 bps (high since Feb. 2009).
EM Contagion Effects gained momentum this week. Friday trading saw the Argentine peso hit 3.8% and the South African rand sink 2.7%. For the week, the Argentine peso fell 6.6%, the South African rand 5.5%, the Brazilian real 4.0%, the Hungarian forint 2.2%, the Romanian leu 2.1%, the Polish zloty 2.2% and the Mexican peso 1.8%. On the (local) bond yield front, 10-year yields in Brazil jumped 66 bps, Russia 40 bps, Hungary 15 bps and South Africa 13 bps. As global “hot money” frets faltering liquidity and the next shoe to drop, Brazilian equities sank 5.9% (as Brazil sovereign CDS jumped 24 bps to 237 bps).

August 10 – Bloomberg (Lionel Laurent): “Turkish President Recep Tayyip Erdogan has been standing firm as investors dump his country’s assets at an alarming pace, saying: ‘They have got dollars, we have got our people, our right, our Allah.’ European banks with substantial investments in Turkey will hope some of that divine providence rubs off on them, too, after sticking with a bet that has gotten more perilous over time.”

Fears of contagion this week were not limited to the emerging markets. With significant exposure to Turkey, European bank stocks were slammed in Friday trading. Unicredit sank 4.7% and ING Groep fell 4.3%. The big German banks, Deutsche Bank and Commerzbank, dropped 4.1% and 3.5%. European Banks (STOXX600) fell 1.9% Friday.

August 10 – Financial Times (Claire Jones, Ayla Jean Yackley and Martin Arnold): “The eurozone’s chief financial watchdog has become concerned about the exposure of some of the currency area’s biggest lenders to Turkey – chiefly BBVA, UniCredit and BNP Paribas – in light of the lira’s dramatic fall…

…click on the above link to read the rest of the article…

Argentina Blew A Billion Dollars To Rescue The Peso On Friday… And Failed

Even Eva Peron would be crying…

The last 24 hours have not been great for Argentina.

First – despite endless jawboning about The IMF bailout and how it will secure the nation’s future and enable reforms, the currency collapsed to a new record low on Friday…

Second – the central bank decided to step in with their newly minted IMF funds and blew over a billion dollars to buy pesos, managing a very modest bounce (but ARS still closed down 3% on the day)

Third – IMF officials spoke with Argentina’s union leaders, warning of the social impact of the ongoing disruptions.

IMF spokesman Raphael Anspach confirmed Werner and Cardarelli’s participation in the call, which “reiterated the main elements of the IMF support to the government’s economic plans, including the measures aimed at supporting the most vulnerable in Argentine society.”

And union officials told the media that The IMF was not worried about the ongoing collapse:

“They are betting on a virtuous behavior by private investors, with the economy falling in the third and fourth quarters of 2018, but rebounding 1.5% in the first quarter of 2019”

“They were not worried about the flight of capital”

Fourth, and finally, and perhaps worst of all – Argentina is now out of The World Cup

A nation mourns.

Currently Argentina fans crying 😂😂

We’re Gonna Need A Bigger Bailout – Argentine Peso Plummets To New Record Low

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?

…click on the above link to read the rest of the article…

Weekly Commentary: Crisis Watch

Weekly Commentary: Crisis Watch

Where to begin? Contagion… The Argentine peso dropped another 5.0% this week, bringing y-t-d losses to 23.7%. The Turkish lira fell 3.9%, boosting 2018 losses to 15.4%. As notable, the Brazilian real dropped 3.7% (down 11.5% y-t-d), and the South African rand sank 4.0% (down 3.0% y-t-d). The Colombian peso fell 3.0%, the Chilean peso 2.7%, the Mexican peso 2.7%, the Hungarian forint 2.3%, the Polish zloty 2.1% and the Czech koruna 2.0%.
EM losses were not limited to the currencies. Yields continued surging throughout EM. Notable rises this week in local EM bonds include 54 bps in Brazil, 27 bps in South Africa, 34 bps in Hungary, 36 bps in Lebanon, 25 bps in Indonesia, 28 bps in Peru, 14 bps in Turkey, 20 bps in Mexico and 11 bps in Poland.

Dollar-denominated EM debt was anything but immune. Turkey’s 10-year dollar bond yields spiked 41 bps to 7.16%, the high going back to May 2009. Brazil’s dollar bond yields surged 29 bps to 5.58%, the highest level since December 2016. Mexico’s dollar yields jumped 18 bps to 4.64%, the high going all the way back to February 2011. Dollar yields rose 19 bps in Chile, 28 bps in Colombia, 19 bps in Indonesia, 14 bps in Russia, 14 bps in Ukraine and 167 bps in Venezuela (to 32.80%). Losses are mounting quickly for those speculating in EM debt.

Developed bonds were under pressure as well. We’ll begin with Italy:

May 17 – UK Guardian (Jon Henley): “Italy’s new government, likely to be formally confirmed within the next few days, sets a perilous precedent for Brussels: it marks the first time a founding member of the EU has been led by populist, anti-EU forces. From the EU’s perspective, the coalition of the anti-establishment Five Star Movement (M5S) and the far-right League looks headstrong and unpredictable, possibly even combustible. Leaked drafts of their government ‘contract’ include provision for a ‘conciliation committee’ to settle expected disagreements. Mainly it looks alarming. Both parties toned down their fiercest anti-EU rhetoric during the election campaign, dropping previous calls for a referendum on eurozone membership…

…click on the above link to read the rest of the article…

Argentine Peso Collapses 29% After Government Lifts Currency Controls

Argentine Peso Collapses 29% After Government Lifts Currency Controls

For those interested in a case study of what happens after a dramatic devaluation, you now have front row seats for what is likely to be a 25-30% peso plunge. Grab the popcorn. 

That’s what we said on Wednesday evening in “Prepare For Peso Plunge: Argentina Lifts Currency Controls,” after the country’s FinMin Alfonso Prat-Gay announced that, as promised, new President Mauricio Macri would move to unify the official and black market exchange rates in the face of depleted FX reserves and still sky high inflation.

Here’s what the gap looked like as of yesterday:

On Thursday, the move to a float sent the peso plunging by nearly 30%:

Now let’s just hope Macri’s move to negotiate new terms for the $17 billion derivatives book amassed by former central bank governor Vanoli is enough to keep the country from taking a massive hit on its dollar futures.

Currency Controls Strangle Argentina, But Hey, “Take it up with the Next Government, We’re on Our Way Out”

Currency Controls Strangle Argentina, But Hey, “Take it up with the Next Government, We’re on Our Way Out”

Running out of money doesn’t care if you’re a socialist or neoliberal.

Last week wasn’t easy for President-on-her-way-out Cristina Fernández de Kirchner. On the political front, she treated us with deafening silence following her candidates’ poor performances in the general election. But on the economic front her government was not so quiet.

Remember how Argentina’s reserves, or how much foreign currency the Central Bank holds, has been creeping lower despite foreign currency controls? Last week the Central Bank (BCRA) and National Insurance Regulator jumped back in to keep the country from running out of money for just a little while longer.

First, the BCRA raised interest rates by three percent, the highest in 18 months, to try to make holding pesos more attractive. Shockingly, not many people rushed to buy peso notes. The government sold ARS $11.3 billion, five percent less than the previous week, despite the higher rate.

Next, the Insurance Regulator passed a new law forbidding insurance companies from holding dollar assets in excess of their dollar contracts. English translation: Insurance companies whose clients are in Argentina and thus likely have peso-denominated policies cannot hold dollars even though the peso is likely to depreciate before these policies are paid. Not good news for the peso policy holder.

Importers received informal calls from their banks informing them that the automatically-approved amount they are permitted to pay providers was cut in half, from US $150,000 to US $75,000. While that might seem like a reasonable number please be advised that you can’t buy very many car parts, air conditioner blades, or other industrial input with US $75,000. This adds to the US $9.5 billion (that’s right, billion) that the Central Bank is already in debt to importers. Commerce Ministry Sub-Secretary Paula Español reportedly told importers to, “take it up with the next government – we’re on our way out.”

…click on the above link to read the rest of the article…

Did Argentina’s CNV Pass a Law to Avoid a Bond Payment?

Did Argentina’s CNV Pass a Law to Avoid a Bond Payment?

Last Tuesday, Argentina’s securities regulator, the CNV, shocked markets by announcing Resolution 646 requiring that mutual funds price dollar-denominated assets in pesos at the official government rate rather than the market rate that is closer to the parallel or blue dollar. Despite efforts from banks and industry organizations to organize a longer time period in which to react to this change, Economy Minister Axel Kicillof refused to meet with representatives and the law came into force on Friday.

Unlike other government interventions in the parallel market, this sudden “pesofication” of somewhere to the tune of US $15 billion worth of investor assets came as a real shock to the industry — as in no one saw it coming.

So what would entice this government to force the conversion of dollar-priced assets held by mutual funds into pesos at the official rate? Mutual funds are investment vehicles created for small and medium savers. They have a low minimum entry point and up until last week were a way for Argentines to save money without squirreling away physical dollar bills in boxes buried under stairs. This measure actually hurt small savers and helped no one.

Previous interventions in the market have served to bring both the blue dollar and the bond-linked contado con liquidacion (ccl) or “blue chip swap” rates down. This shock caused bond prices to temporarily plunge and the blue dollar rate to shoot up to record highs of 16.05 ARS/USD. Furthermore, the effects on the ccl market were short lived. Before the announcement, the ccl rate was at 14.05 ARS/USD. It dropped to 13.19 before and has rebounded back to 13.85 ARS/USD.  So in this case, the government temporarily brought down bond prices at the expense of small savers and the blue dollar. What gives?

…click on the above link to read the rest of the article…

Olduvai IV: Courage
In progress...

Olduvai II: Exodus
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