September 28, 2018 / 7:56 PM / 2 months ago

UPDATE 1-Argentina peso's slide may test band under IMF deal- economists

(Recasts with comments from analysts, peso close)

By Gabriel Burin and Scott Squires

BUENOS AIRES, Sept 28 (Reuters) - Argentina’s peso in the coming days could test the limits of a currency band aimed at stemming central bank intervention under a revised $57 billion agreement with the International Monetary Fund, economists said on Friday.

As part of the revised deal, Argentina’s central bank announced it would establish a trading band for the peso between 34 and 44 per dollar. The band would depreciate daily at a rate that would come to 3 percent per month. As long as the peso stays in the band, the central bank will not intervene in currency markets.

Argentina’s currency has been at the center of emerging market turmoil this year. It lost a further 3.87 percent on Friday to close at 41.3 per dollar, bringing losses for September to 10 percent, traders said.

The peso is down nearly 55 percent against the dollar this year as foreign investors fled amid fears President Mauricio Macri’s center-right government might be unable to service its debt next year.

Analysts said the market looked ready to test the limits of the currency band next week. The central bank has spent $16 billion so far this year propping up the peso.

“We are concerned that a wide band could lead markets to test the currency and push it to the upper limit of the no intervention zone, even if the peso has already undergone a significant devaluation,” Morgan Stanley said in a report.

The central bank also has hiked interest rates to a punishing 60 percent in a failed bid to control inflation, which is expected to top 40 percent by year end.

Argentina’s new Central Bank President Guido Sandleris - an economist and academic appointed on Tuesday after his predecessor unexpectedly resigned, said attacking inflation rather than controlling the exchange rate would be the central bank’s priority.

“Foreign exchange futures exerted pressure on the peso and the outlook still looks uncertain next week,” said Gustavo Quintana, a trader at local brokerage PR Corredores de Cambio.

Sandleris met with banking executives on Thursday to discuss raising reserve requirements but there is no date set for any announcement, newspapers Cronista and BAE reported, citing sources present in the meetings. His predecessor Luis Caputo, a former Wall Street trader, raised reserve requirements several times since July to reduce liquidity.

Under the IMF deal, the central bank has dropped an inflation target in favor of limiting money supply. Sandleris said it will target zero growth in the monetary base until June 2019, down from the current growth rate of 2 percent a month.

The central bank is also discussing a reduction in the amount of short-term debt, known as Lebac, allowed to replace hard cash in bank reserves, the reports said.

IMF Managing Director Christine Lagarde said the financing agreement, the largest in the Fund’s history, would boost loan disbursements by $19 billion through the end of 2019 to calm investor fears. (Reporting by Gabriel Burin, Walter Bianchi and Scott Squires Writing by Scott Squires Editing by Daniel Flynn, Steve Orlofsky and David Gregorio)

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