Traders Bet Big on Milei Crushing 200% Inflation in Argentina: Shock Therapy
Ignacio Olivera Doll Thu, November 7, 2024 at 7:50 AM
Bloomberg) – Argentine President Javier Milei’s crusade against inflation has gotten off to an uneven start in year one. The annual rate, while slowing, remains above 200%. But investors are betting that next year will bring far greater progress, predicting the rate will steadily plunge.
Pricing in the local bond market indicates traders foresee the monthly inflation rate dropping to 1.9%, dragging the annual rate down to 25%, according to PPI, a local brokerage. That’s below the 35% rate consensus forecast by economists and would mark the lowest annual rate in seven years.
Argentines have lived through triple-digit annual price increases for almost two years. The cost of living has come down but remains elevated, hitting an annualized rate of 209% in September compared to its previous peak of 289.4% in April and 138% during the prior-year period, according to statistics agency INDEC.
“People had given Milei a very clear mandate: lower inflation, no matter what,” said Barbara Guerezta, a strategist at Delta Asset Management in Buenos Aires. “Milei knows he has to fulfill a campaign promise and he is doing it.”
Private economists are already projecting that monthly inflation plunged below 3% for the first time in three years. Consulting firm Orlando Ferreres & Asociados estimated 2.7% for October, which would be the lowest figure since November 2021.
The so-called break-even, or the gap between fixed-rate and inflation-linked bonds, shows the market is forecasting lower inflation levels than economists predict. Many of them estimate that it will come in at an annualized rate of 35% in 2025, according to a recent survey by the country’s central bank.Delta Asset Management, on the other hand, expects it to collapse to as low as 20% for the year. Too good to be true?
A 2017 repeat?
The stakes are high not just for Javier Milei’s government, but also for investors. “This trade was based on total confidence in the government’s plan,” said Alejo Costa, chief economist at brokerage firm Max Capital.
Investors who took part believe that the government will succeed in reducing inflation, depreciating the official peso and strengthening the parallel peso, which is based on securities bought locally and sold abroad. It trades about 16% weaker than its peer.
Lurking behind this optimistic strategy is a simmering concern that Milei is letting theArgentine peso become too strong, even before Donald Trump’s election win sent the US dollar on a rally. A stronger dollar exacerbates pressure on Milei’s currency controls, and some analysts warn of another devaluation.
https://finance.yahoo.com/news/traders-bet-big-milei-crushing-125052625.html
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