BUY OR SELL-Argentine peso's post-election fate up in air

By Hilary Burke

BUENOS AIRES, June 18 (Reuters) - Argentina's peso has been gradually losing ground against the dollar, and analysts debate what will happen after a June 28 midterm election, seen as a tough test for President Cristina Fernandez.

The peso has weakened 7.9 percent since the start of the year to 3.845 per dollar in informal trade ARSB=, and is down 8.3 percent at 3.7675 per dollar in formal interbank trade ARS=RASL, where the central bank intervenes nearly every day to avoid abrupt movements in the currency's value.

Several factors have eased pressure on the peso, including a rebound in the Brazilian real (BRBY), higher-than-expected prices for Argentine commodities, particularly soy, and a rapidly expanding trade surplus.

Fernandez backs a "competitive" exchange rate to boost local industry and exports. But the central bank must keep from triggering a run on greenbacks in a country where devaluation fears often run rampant, especially around election time.

STRONGER PESO

Bucking the general consensus, Christopher Ecclestone of New York-based research firm Hallgarten predicts the peso could appreciate to around 3.5 per dollar by year's end.

"Argentina's commodities exports are now back hitting the levels that they were at the best of times, so I'm not seeing why from a currency point of view Argentina should bomb out."

Ecclestone said it was easy for Argentina to allow a gradual depreciation when other currencies were also down against the dollar. But it would take more effort now and could risk fueling inflation, which has slowed but still hovers near 15 percent annually, according to private estimates.

"If the agriculture sector picks up and has extra cash, and everyone else is saying it's party on time now, we'll be back to where things were in July of last year. And is there any reason why inflation should not bust out again?"

The central bank must avoid a run on the peso to protect its foreign reserves, which it uses to intervene on the foreign exchange market to stabilize the local currency.

"If you've got $10,000, $20,000 or $100,000 worth of money to just stash away, are you going to keep it in pesos when (the president) has pushed it from 3.20 to 3.70, everyone else's currency is improving except Argentina's, and she thinks she's going to push it to 4 or more? Who's gonna bother to hold it?"

HEDGE AGAINST SLUMP

Deutsche Bank sees the peso dipping to 4.05/4.10 per dollar by year's end due mainly to inflation, meaning the currency would depreciate nominally but not in real terms, said Gustavo Canonero, head of emerging markets economic research.

"In principle, a country that has a strong current account and trade surplus doesn't need a weaker currency," he said.

"The forecasts for a weak currency are based on the capital flight we're still seeing. It's difficult to forecast the peso because you have to anticipate what will happen to trust levels among economic agents in Argentina, or political factors."

Given Argentina's healthy trade situation and the improved global context, Canonero said there was no reason to expect major changes after the June 28 legislative election.

"The only issue is whether the government could surprise us after the election, for better or for worse, with a policy initiative, which could be either favorable or counterproductive for the peso," he said.

In terms of an investment strategy, Canonero said betting for or against the peso in futures markets doesn't offer much chance to profit. But he would recommend buying undervalued Argentine bonds and using the currency as a hedge in case investors are not willing to take the full credit risk.