Argentina’s peso closed weaker again on Tuesday following a second day of market turmoil triggered by opposition candidate Alberto Fernandez’s landslide victory in a primary election that dealt a severe blow to President Mauricio Macri’s re-election chances.
The peso closed 4.29% lower at 55.9 per U.S. dollar after touching 59 to the dollar earlier. The currency had hit an all-time low on Monday of 65 to the dollar, a drop of 30%, on fears that a Fernandez government could take Argentina back to interventionist economic policies.
The central bank has sold a total $255 million of its own reserves since Monday in an effort to help steady the currency.
“The market thinks Fernandez will likely default and impose capital controls and renegotiate with the IMF. In a nutshell, the market thinks Fernandez is the return of populism,” said Claudio Irigoyen of Bank of America Merrill Lynch (BAML).
Fernandez, who has former President Cristina Fernandez as his running mate, pulled off a stunning upset in the primary with a wider-than-expected 15-point lead over Macri, a free market proponent.
Monday’s crash in the peso unnerved global equities investors, with markets already jittery over the Sino-U.S. trade war and protests in Hong Kong.
“Yes, Argentina is a small economy. However, the last thing global markets want to see is another market-friendly government fall to populism and/or geopolitics,” said Rabobank strategist Michael Every.
Blame Game
In an interview Monday, Fernandez said he was willing to collaborate with the current government after his primary triumph on Sunday sent the peso, stocks and bonds reeling.
The primary results showed Fernandez, a former cabinet chief, was well placed to win October’s general election in the first round. He blamed Macri for the market turmoil.
“The dialogue is open, but I don’t want to lie to Argentines. What can I do? I’m just a candidate, my pen doesn’t sign decrees,” Fernandez said in an interview with Argentine TV channel Net TV broadcast on Monday.
“Markets react badly when they realize they were scammed,” Fernandez said earlier on Monday, adding that Argentina lives in a “fictitious economy” and that Macri’s government is not providing answers.
“Accessibility of the market for foreign investors is the key factor here,” said Pavlo Taranenko, executive director of index research at MSCI.
As concerns rise about Argentina’s ability to meet its debt obligations, investors are looking closely at the government’s ability to roll over its short-term notes known as ‘Letes.”
“Markets will be sweating bullets each time one of these maturities come due,” Jeffries Fixed Income said in a note to investors.
The cost of insuring against an Argentine sovereign default jumped again on Tuesday, according to data from IHS Markit.
Markit’s calculations price the probability of a sovereign default within the next five years at more than 72%.
Analysts also predicted the peso’s fall would continue. BAML said it expects the exchange rate at 70.5 by end-2019 and 106.6 by end 2020.