USD/ARS - no easy way out - Rabobank

"USD/ARS rallied significantly back in late April but we saw further legs higher in mid-June and mid-August before an acceleration of ARS selling in late August resulted in a larger nominal rise in USD/ARS than all of those previous three moves combined," Rabobank analysts point out. " In fact, we saw USD/ARS rally 31% across just two trading sessions."

Key quotes

"USD/ARS rose 105% from around the 20 level where it stabilised through March and early April to a high of 41.3618 on August 30th."

"Broad-based EM weakness and contagion from Turkey were drivers of the August move but a request for early access to the remaining USD 35bn of the IMF select credit line also triggered panic selling that pushed USD/ARS higher."

"The central bank raised rates 1500bp to 60% and increase bank reserve requirements 500bp to 36% in response to the currency move but this did little to support for the currency. As concerns rose, the government announced a slew of austerity measures on September 3rd."

"These measures could prove counter-productive in the longer term given the problem arguably lies with the private sector rather than the public sector but these measures are likely to be welcomed by the IMF and could pave the way for a larger credit line."

"If a larger credit line from the IMF is not forthcoming then in an environment of rising USD and US interest rates it is hard to see where the relief will come from for ARS and indeed other EM currencies with twin deficits and high levels of USD denominated debt."