Argentine peso, inoculated by controls, outperforms amid pandemic

BUENOS AIRES/NEW YORK, March 20 (Reuters) - Argentina’s peso, one of the worst-performing global currencies over the past two years, is now in an unusual position: outperforming Latin American peers as capital controls artificially inoculate it against the coronavirus pandemic.

The currency, which lost around three-quarters of its value against the dollar in 2018 and 2019 combined, has edged slowly lower this year. But is has avoided the sharp drops suffered by the Mexican and Chilean pesos, which have hit historic lows.

The seeming out-performance, however, masks a bubbling tension in the Argentine peso, reliant on controls imposed late last year to stop a dangerous slide on reserves, leaving the currency’s official valuation out of whack with reality.

The black market rate from informal dollar trades has diverged sharply from the official spot, with the gap now close to 40% and at levels not seen since the end of 2015 under populist former President Cristina Fernandez de Kirchner.

That could spell trouble ahead.

“When the differential grows, prices and inflation are less determined by the official rate and more by the black market,” said Armando Armenta, analyst for Latin America fixed-income and currency markets at AllianceBernstein. “With a bigger differential the government’s goal to keep inflation at bay without having to burn through reserves can get to a point where it doesn’t work.”

Argentine currency controls include a 30% tariff on exchanging pesos to dollars and overseas card spending from Argentine accounts, which makes the official exchange route more expensive than it looks.

Reporting by Adam Jourdan and Rodrigo Campos; Editing by Will Dunham