The Argentine peso strengthened while bonds and shares plummeted on Tuesday as the market responded to the treasury’s announcement that it would intervene in the country’s foreign exchange market. Market participants and analysts said the move could increase uncertainty.

The U.S. dollar exchange rate opened the session at AR$1,380 and fell to AR$1,361 by market closing, after the Treasury’s dollar selloff.

Finance Secretary Pablo Quirno announced on X that the Treasury would sell dollars to “ensure liquidity” and guarantee that the market “operates normally.” Exchange rate volatility had increased ahead of Sunday’s elections in Buenos Aires province.

The announcement means the government is backtracking on its April decision to let the exchange rate float freely. That change happened in lockstep with the signing of a US$20 billion loan with the International Monetary Fund (IMF). At the time, the government said the dollar exchange rate would move freely between upper and lower limits known as bands, depending on market supply and demand.

“Now, we have bands within bands,” economist Christian Buteler wrote on X.

The IMF deal limits the government’s ability to intervene in the foreign exchange market. An Economy Ministry source told the Herald that the lender had approved Tuesday’s renewed market intervention. The IMF did not respond to a request for comment.

Until now, the Central Bank and the Treasury had been intervening in the market with indirect strategies, such as interest rates that tripled the monthly inflation rate, bidding in the futures market, and tightening exchange restrictions on banks.

While it was the Treasury, not the Central Bank, that sold dollars in the market on Tuesday, the intervention went via the Central Bank because the Treasury itself is not authorized to trade through Siopel, the system used in the country for the foreign exchange market, market sources told the Herald. The Treasury has around US$1.7 billion in its Central Bank dollar account.

“The decision was surely made to prevent the exchange rate from reaching the upper band of the fluctuation range in the days leading up to the weekend elections,” Gustavo Quintana, an analyst and broker for PR Corredores, told the Herald. He added that a “spiraling rise” could have “consequences for the rest of the economy if it occurs quickly and significantly.” 

Pablo Repetto, head of research at broker Aurum Valores, told the Herald that the most immediate effect of the move would be a spike in the EMBI or country risk index, which measures the likelihood of a debt default.

By any means necessary

He said the government was “very concerned about keeping the dollar stable by any means necessary” and added that the decision was “highly dependent on a not-too-negative result” in the Buenos Aires province elections.

Auxtin Maquieyra, commercial manager of the Sailing Inversiones stockbroker, said the dollarization of portfolios has been putting pressure on both the exchange rate and bonds and stocks. “The message is both political and financial: they are seeking to provide some certainty to a market that has seen sharp swings and liquidity gaps in recent days,” Maquieyra added.

Over the past week, market analysts have been warning that the administration was intervening in the forex market via the Treasury’s foreign currency reserves. Consulting firm Aurum Valores estimated that the Treasury’s reserves were down by about US$262 million in the first three weeks of August.

“What is clear is that the Treasury’s role as an actor is now explicit,” Maquieyra said, adding that the move could moderate exchange rate volatility during the campaign, “although at the cost of accelerating the use of reserves and reducing the room for maneuver towards the end of the year.”

Independent financial analyst Gustavo Ber said the announcement is intended to discourage future sales that would need to occur if the exchange rate reached the upper limit of the band.

“The Treasury is seeking to prevent the Central Bank from having to sell foreign currency that would affect reserves, contrary to the accumulation objective sought by investors and also agreed on with the IMF,” Ber said.

Dollar-denominated bonds fell by up to 2%, led by the Global 2046, followed by the Bonar 2041 (-1.8%) and the Bonar 2038 (-1.5%). Argentine stocks traded on Wall Street through ADRs fell by up to 7.4%, led by Telecom, Grupo Supervielle (-5.7%), and Grupo Financiero Galicia (-5.3%).