Record Low Argentine Peso Is No Barrier to Carry-Trade Bulls

(Bloomberg) -- Argentina's peso is hovering near record lows, but carry-trade investors aren't worried.

Taking advantage of some of the world's highest interest rates, investors who borrow in dollars to buy local assets are finding there's money to be made even as the peso drops and analysts call for further declines. BBVA Securities Inc. predicts dollar returns of 6.5 percent this year from Argentina's fixed-rate local paper even with a weaker peso.

"Argentina's carry is so high it compensates for peso depreciation in the months ahead," said Alvaro Vivanco, the head of Latin America strategy for BBVA, who recommends fixed-rate local bonds known as Botes due in 2021 and 2023. He says interest rates will stay elevated as the central bank focuses on damping inflation expectations.

The currency dropped over the past two weeks to a record as investors pulled money out of the region amid a political crisis in Brazil that threatened to derail efforts to prop up Latin America's largest economy and Argentina's biggest trade partner. That's left it 0.7 percent weaker this year, and strategists surveyed by Bloomberg expect another 5.4 percent decline to 16.9 per dollar by the end of the year.

With yields as high as 22 percent for Argentina's shortest-term Bote due March 2018, the peso would have to fall significantly past 17.5 per dollar this year, or 19 per dollar in 2019, for returns to stop being attractive, Vivanco said. Argentina's peso closed at 16 per dollar on Tuesday.

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Not everyone is so sanguine. Jorge Piedrahita, the chief executive officer of New York-based broker Torino Capital, says investors already doing the carry trade should hang on for now, even if the currency drop has made placing a big bet less appealing. The risk is that when the time does come, everyone will want to exit simultaneously, he added. He called it a "Puerta 12" moment, in reference to the 1968 stampede at a soccer match in Buenos Aires where the 12th exit door didn't open and 71 people died.

"It's a bit late to enter the carry trade," Piedrahita said. "Rather, it's a year to start thinking of when to exit. But it's not the moment yet."

A surprise opposition victory in October's legislative elections could spur strong peso outflows that would send the currency tumbling, but analysts at BTG Pactual Group led by Alejo Costa don't see that as the baseline scenario. They expect President Mauricio Macri's party's performance to remain in line with the October 2015 results that brought them to power.

The carry trade "still offers some juice relative to USD positions, with USDARS16.1 as a good entry point," they wrote in a note. "Local currency positions still have some appeal."

To contact the reporter on this story: Carolina Millan in Buenos Aires at cmillanronch@bloomberg.net.

To contact the editors responsible for this story: Rita Nazareth at rnazareth@bloomberg.net, Arie Shapira at ashapira3@bloomberg.net, Christiana Sciaudone, Brendan Walsh