Trading on the U.S. dollar/Argentina peso forward market came to a near halt last week as market players backed away in the wake of the country's ensuing political and economic chaos and waited to see if the currency peg to the U.S. dollar breaks. By Friday the market had already adjusted for the pending break by pricing the one-month forward between ARS1.40-2. "Nothing is happening in the market now. It's so illiquid. There is no interest to buy or sell. The market is nonexistent," said Hank Lynch, v.p. of foreign exchange options at FleetBoston.
James Kennan, v.p. of emerging markets trading at BNP Paribas in New York, said the options market probably wouldn't develop for at least a year. He predicted it will take about that long for the country to stabilize politically and economically enough for banks to write risk. However, he added that the foreign exchange market is not undergoing the same freefall it suffered during the Asia market collapse in 1997-98 because investors have had more time to unwind positions in Argentina. "This has been a real slow motion kind of crisis. Everyone has had plenty of time to get out," Kennan said.
The peg could break at any time now that the president and the cabinet have been tossed out, according to Bob Gay, global head of fixed income research at Commerzbank Securities in New York. He added that Argentina's central bank has about USD3 billion in reserves and it is quickly running out. "Once the bank can't afford to defend the peg, its going to have to float the currency because it won't have enough dollars to pay the outflow," Gay said.
A foreign exchange marketer in New York reported seeing only one trade go through amid the chaos last Thursday. It was a one-week forward at ARS1.30. "Nobody is going to do anything longer than one week. That was the only trade I saw. Everybody is really nervous and staying out of the market," he added. Jason Bonanca, v.p. currency strategist at Credit Suisse First Boston in New York, said "the peg is so far in place, but the whole thing is about ready to blow up and everyone knows it."
