Argentina’s embattled peso gained strength on Monday after the central bank said it would ease limits on its foreign exchange market interventions, signaling its willingness to sell reserves in an effort to better control the volatility of the local currency. The peso began the session up 3.37% and closed 3.56% stronger at 44.37 per U.S. dollar.
Before the foreign exchange market opened, the central bank said it may start selling dollars below the threshold of 51.448 pesos per greenback. This had previously not been allowed under the country’s US$ 56 billion standby financing deal with the International Monetary Fund (IMF).
The new set-up gives the central bank more freedom to support the local currency by loosening a no-intervention peso trading band that had been in place since October.
“The Central Bank of Argentina introduced important measures today to address recent financial market and foreign exchange volatility. We support these measures, which are well calibrated to the challenges facing Argentina,” International Monetary Fund spokesman Gerry Rice said in a statement.
The likely increase in dollar sales was expected to drain pesos from the economy, further adjusting an already ultra-tight monetary policy punctuated by benchmark interest rates of over 70%.
“We view the possibility to intervene and sell dollars in the foreign exchange market as positive,” investment bank Morgan Stanley said in a note to clients.
“It should reduce foreign exchange instability. We believe some relative stability will help improve inflation dynamics and sentiment going forward,” it said.
The peso hit a record low on Friday, ending a tough week for local markets buffeted by uncertainty over Argentina’s recession, 54% inflation and the October general election.
President Mauricio Macri wants to win a second term in October. A proponent of free markets, Macri came to office in 2015 as a favorite among business leaders and investors. Opinion polls show him losing popularity as he cuts public utility subsidies to erase the primary fiscal deficit.