The worst is yet to come for the Argentina peso, already the world’s weakest currency this year, according to Bank of America Corp. strategists.
The official exchange rate will weaken to 545 per dollar for the end of this year and then slump to 1,193 by the end of 2024, as the bank’s strategists expect the winner of the country’s presidential elections to further devalue the peso starting in December.
The current government this week devalued the currency by 18% to 350 after suffering a defeat in a crucial primary election on Sunday. Argentine assets slumped following a stronger-than-expected performance by libertarian candidate Javier Milei, who wants to dollarize the economy and abolish the central bank.
“The FX market will remain under pressure,” said strategists including Sebastian Rondeau, Jane Brauer and David Hauner. “We expect further devaluation ahead.”
They pointed to increasing political uncertainty, pressure on inflation ahead of October’s general elections, the impact of drought on exports and currency reserves in negative territory.
The devaluation led Argentines who don’t have access to dollars in the official market to race to buy them in the parallel market on the streets of Buenos Aires, pushing that rate above 700, according to website dolarhoy.com.
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The Bank of America strategists said the devaluation was “overall positive” given the currency was highly overvalued, and said it was favorable that the current government was bearing the burden of part of a necessary macroeconomic adjustment.
“It should be favorable for the IMF agreement that is pending IMF Board approval for a $7.5 billion loan disbursement,” they wrote. However, the devaluation will put further pressure on inflation.
The nation’s bonds, already deeply distressed, led declines across emerging markets after the move. Bank of America maintained an overweight recommendation on the debt as the strategists see a strong and clear mandate for change in economic policies.
