A Currency in Freefall – the Danger Posed By the Tumbling Peso

Posted by Allison on 28 January 2014, 11:54

It’s not that often we see a currency that drops like a stone. We’re used to seeing ups and downs – the regular comings and goings that form an essential daily part of the currency markets. But a huge drop such as the one experienced by the Argentine peso in the last day or so happens far less often.

So what exactly has happened here? Well, to begin with the peso has been on a slow slide for some months now. If we go back to 1st September last year, we can see the peso was worth 0.1766 against the US dollar. This actually stayed reasonably steady until mid October when the peso dropped below 0.17, reaching a low of 0.1699 in the process.

By the middle of December the idea of an exchange rate hovering around the 0.17 mark was little more than a pipe dream. By now the rate was 0.1597. This all stemmed from the actions of President Fernandez de Kirchner in November. She decided it would be a good idea to get rid of her existing economic team and replace it with a new one.

The International Monetary Fund has looked down its nose at the actions of Argentina’s government in recent times. The government has been reluctant to provide accurate inflationary data. The central bank has also spent the last four years printing pesos, which has led to nearly a third more cash in the country than there was just a few years ago.

All in all things aren’t looking good. At the time of writing the current exchange rate is a mere 0.1395 against the US dollar. Who knows how much lower it could dip? One thing is certain though – the situation has put the government in jeopardy with many believing President Fernandez de Kirchner’s days in the hot seat are numbered. The biggest question is how many days it will be until she vacates that seat.

The central bank in the country isn’t supporting the currency in the way it once did. This is not a good sign – and it remains to be seen whether anything better is in the offing.