Argentina peso weakens after central bank shake-up

BUENOS AIRES (Reuters) - Argentina’s peso weakened on Friday, a day after the resignation of former Central Bank President Federico Sturzenegger, who was replaced late Thursday by former Finance Minister Luis Caputo.

FILE PHOTO: People walk past Argentina's Central Bank in Buenos Aires' financial district, Argentina, December 16, 2015. REUTERS/Marcos Brindicci

The peso opened up more than 4 percent but ended the week down 1.05 percent at a record low 28.45 per dollar as traders took in central bank leadership under Caputo, who worked for JP Morgan for more than a decade before joining President Mauricio Macri’s government. The Merval stock index fell 1 percent.

The surprise shakeup, which followed several weeks of currency volatility that led Argentina to seek a $50 billion (£37.6 billion) lifeline from the International Monetary Fund, was aimed at restoring trust in the central bank and calming markets.

The peso weakened nearly 11 percent over the week and is down 34.45 percent since the beginning of the year.

“(Caputo) has not even started and the market already turned its back on him,” said one trader.

Local brokerage Portfolio Personal said in a report impatient investors were waiting for a clear currency strategy.

Nicolas Dujovne, who now oversees a combined finance and treasury ministry, said at a news conference currency volatility should end with the arrival of an initial $7.5 billion of IMF funds following the expected approval of the financing by the IMF board on Wednesday.

The finance ministry has said those dollars will be sold in the spot market at scheduled auctions to support the government’s budget.

Dujovne said the central bank could intervene in the spot market if needed under the country’s agreement with the Fund and that the central bank would start reducing one-month Lebac securities that have increased market volatility.

“We have ratified it with the Fund. We have a floating system in which the central bank can intervene,” Dujovne said.

“We are working with the new president of the central bank... on a schedule to strengthen the central bank balance sheet, replacing the central bank’s papers that have very high rates and short-term maturities,” he added.

Last week, Sturzenegger suggested the central bank would stop intervening in the local spot market. But then it sold more than $500 million on Tuesday and Wednesday before letting the peso slide 6.22 percent to a record low on Thursday and further weaken on Friday.

The central bank under Sturzenegger has also been criticized for lowering interest rates in January despite surging inflation. It later raised rates to 40 percent, the highest in the world, to support the peso.

“Caputo has a lot of experience in what one could call market management,” said Daniel Marx, executive director of financial advisory firm Quantum Finanzas and Argentina’s former secretary of finance.

“Here clearly the preference is for someone who has experience in how the market works and reacts.”

Dujovne conveyed a message of continuity on Friday, saying he planned to maintain most members of the economic team and affirming the government’s plan to present a new charter on the independence of the central bank to Congress, a requirement of the IMF agreement.

A ministry spokesman said a secretary of finance will be named later.

But Central Bank Deputy Governor Lucas Llach said on Friday he was following Sturzenegger’s exit, as did second deputy governor Demian Reidel.

“My hope is that the great team who will follow us can correct what we did badly, improve what we did well, and do what we were not able to,” Llach wrote on Twitter.

Additional reporting by Eliana Raszewski; Writing by Caroline Stauffer; Editing by Bernadette Baum and Dan Grebler