(Adds central bank debt sale, peso closing level, analyst quote)
By Hugh Bronstein
BUENOS AIRES, Oct 1 (Reuters) - Argentina’s peso rose on Monday as investors welcomed an International Monetary Fund deal to stabilize the inflation-racked economy that includes containing the currency within a trading band after the peso lost more than half its value this year.
The peso rose 4.42 percent to close at 39.55 per dollar, more than making up for losses of 3.87 percent against the greenback on Friday. Monday’s gains came on the back of a central bank debt sale aimed at mopping up excess peso liquidity and signs that the IMF is solidly behind Argentina.
The market is looking for signs that the country can close its fiscal deficit fast enough to restore confidence in the government’s ability to honor its debts. But with the economy shrinking and President Mauricio Macri facing opposition to budget cuts ahead of his 2019 re-election campaign, analysts said the peso could remain volatile over the months ahead.
Last week the Macri administration agreed to a $57 billion IMF standby financing deal, upgraded from an original $50 billion. The revised pact includes sharper spending cuts and tax hikes, and a trading band for the peso of 34 to 44 per U.S. dollar that was launched on Monday.
“Market participants have been surprised by the level of support that the IMF has for Argentina. This has led investors to feel more comfortable with Argentine risk,” Daniel Osorio, president of New York-based consultancy Andean Capital Advisors, said in a telephone interview.
“This is not a reflection of the market believing that Macri’s policies are working. This is a reflection of market participants feeling that, for now, the IMF is a very helpful and loyal partner to Argentina in this brewing crisis” he said.
The central bank will intervene in the foreign exchange market to support the currency if the 44 per dollar threshold is broken. The bank has spent almost $16 billion to prop up the peso so far this year by auctioning U.S. dollar reserves.
Traders said the peso was also shored up on Monday by a sale of $1.78 billion worth of seven-day “Leliq” notes. The bank says it plans to offer Leliqs regularly as a way to reduce the amount of pesos available for nervous investors to put to work buying safe-haven U.S. dollars. The strategy could help ease inflation expected by economists to end 2018 at more than 40 percent.
Last month, Macri was forced by the sinking peso to renegotiate the $50 billion IMF standby deal he had signed in June. This month the government unveiled its 2019 budget bill, offering a new round spending cuts and tax hikes aimed at slashing Argentina’s primary fiscal deficit to zero in 2019 from an estimated 2.6 percent of gross domestic product this year.
Macri is expected to run for a second term next year. With the economy in recession, getting spending cuts through Congress in an election year will be challenging.
A bill he introduced in December to cut pension benefits sparked violent protests in front of Congress. The bill was eventually amended to soften its impact and passed into law.
Hundred of non-violent demonstrations have been held since. Shops, grains ports and public transport across Argentina shut down on Tuesday when the country’s largest union called a 24-hour strike to protest fiscal belt-tightening measures and press for pay increases in line with inflation. (Reporting by Hugh Bronstein Additional reporting by Gabriel Burin, Walter Bianchi and Cassandra Garrison Editing by Daniel Flynn and Frances Kerry)