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ARGENTINA: Goldman Sachs Sees Strict Management Of Peso Depreciation Until Oct

ARGENTINA
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  • Goldman Sachs says that last week’s announced change in the crawling FX peg strengthens their view that the Milei administration will be committed to maintaining a strict management of the peso's depreciation until the October midterm elections, to avoid compromising the progress on disinflation.
    • They see USDARS at 1,080 in 3-months and 1,110 in 6-months (vs. 1,050 and 1,120 previously), but factor in a ~20% weakening after October to bring USDARS to ~1,350 (vs. 1,250 previously) in 12 months. GS see risks to their 3- and 6- month forecasts as skewed towards a weaker peso.
    • Given the likelihood of a new IMF programme that would bolster BCRA FX reserves and given that the government has already met a significant share of its external funding needs this year, there is limited urgency to make the currency more competitive to accumulate reserves ahead of the elections (excluding new IMF programme requirements).
    • Beyond the elections, while the slower pace of FX depreciation would help to ease inflationary pressures further, it would also deepen the peso’s overvaluation. GS says their model suggests the peso’s overvaluation could widen to more than 20% by October.
    • GS believes that the local FX carry trade would be more compelling once a devaluation has occurred and corrected the overvaluation and authorities succeed in stabilising the currency subsequently.
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  • Goldman Sachs says that last week’s announced change in the crawling FX peg strengthens their view that the Milei administration will be committed to maintaining a strict management of the peso's depreciation until the October midterm elections, to avoid compromising the progress on disinflation.
    • They see USDARS at 1,080 in 3-months and 1,110 in 6-months (vs. 1,050 and 1,120 previously), but factor in a ~20% weakening after October to bring USDARS to ~1,350 (vs. 1,250 previously) in 12 months. GS see risks to their 3- and 6- month forecasts as skewed towards a weaker peso.
    • Given the likelihood of a new IMF programme that would bolster BCRA FX reserves and given that the government has already met a significant share of its external funding needs this year, there is limited urgency to make the currency more competitive to accumulate reserves ahead of the elections (excluding new IMF programme requirements).
    • Beyond the elections, while the slower pace of FX depreciation would help to ease inflationary pressures further, it would also deepen the peso’s overvaluation. GS says their model suggests the peso’s overvaluation could widen to more than 20% by October.
    • GS believes that the local FX carry trade would be more compelling once a devaluation has occurred and corrected the overvaluation and authorities succeed in stabilising the currency subsequently.