USD/ARS forecast: Can Argentine peso hold its own against the dollar amid inflation surge?

The Argentine peso has continued to weaken as political turmoil intensified following the abrupt exit of Economic Minister Martin Guzman. His departure came as the country is working to meet targets set by the International Monetary Fund (IMF) under a $44bn programme to help the second-largest economy in South America tackle eye-watering inflation, boost reserves and spur economic growth.

At the time of writing (2 August), the USD/ARS has increased more than 28% this year. 

The article discusses historical performance and latest news that drive USD/ARS recently which shape the latest USD/ARS forecast from analysts. 

What is USD/ARS? 

Argentine peso or often only referred to as peso is the official currency of Argentina represented with ISO currency code ARS. The current peso began circulating in 1992, according to World Monetary Units: An Historical Dictionary, Country by Country, by Howard M. Berlin.

When Argentina became independent from Spain in 1816, the country kept the former ruler's monetary system of reales, escudos and pesos together with its own coin, the sol. The country used pesos until 1970 when the new peso was introduced. 

The new peso was in circulation until 1983 when the country’s monetary authority introduced the peso argentino. The peso argentino only lasted for two years before it was replaced by the argentine austral (ARA) in 1985. It  was used until 1992, and the new peso was reintroduced in exchange for 1,000 australes. 

The USD/ARS is the US Dollar (USD) and the Argentine peso (ARS) exchange rate published by the Central Bank of the Argentine Republic (BCRA). It is used to calculate how much one US dollar’s worth in the Argentine peso. 

What factors drive USD/ARS?

The primary driver of the Argentine peso is inflation. 

Argentina was one of the wealthiest nations in the world in the early 20 century with its gross domestic product (GDP) per capita exceeding that of European countries, such as France and Germany.  

A combination of political instability, which resulted in poor monetary policy-making and external headwinds, plunged Argentina into a long-period of economic downturn, marked by multiple recessions, hyperinflation and mounting debts.  

Between 1975 to 1990, Argentine’s annual inflation averaged 300% as the country increased money supply to prevent recession. The Argentinian government had tried to curb inflation by replacing peso with Austral, but inflation remained high. 

In 1989, inflation had even reached 3,080%, according to Rabobank’s research. In 1991 to 2001, Argentina's central bank pegged the peso to the US dollar at a fixed rate of 1 peso to 1 US dollar in an attempt to end hyperinflation under the Convertibility Plan. 

Under the Convertibility Plan, Argentineans could convert their pesos into dollars freely. The policy had resulted in widespread bank deposits and loans in dollars, thereby stimulating the economy and resuming economic growth.

The peso-to-US dollar parity was abandoned in January 2002 following the economic and financial crisis in Argentina in 2001, which began with the currency crises in Asia, Russia and Brazil in the late 1990s. The crises had increased borrowing costs for emerging markets, including Argentine. 

The peso depreciated as high as 356% against the US dollar in September that year following the end of the peg, according to Ramon Moreno, Research Advisor at the Federal Reserve Bank of San Francisco, in his research of 2002.  

To respond to the situation, the Argentine government capped the exchange rate at 3 pesos to 1 US dollar, hoping to stimulate exports and thus bring in new money.

The cap on peso was lifted in 2015 following the election of President Mauricio Macri in November. Macri’s election marked the country’s political and economic transformation. In addition to floating peso, his administration liberalised the country’s economy, lifted capital controls, removed export control on some commodities, cut energy subsidies and negotiated debt payments. 

USD/ARS historical performance

Since the peso was floated in 2015, it has continued to lose value against the US dollar. 

In January 2016 – shortly after it was floated – the USD/ARS started at 13.88 Argentine pesos per US dollar. In January 2020, just before the Covid-19 pandemic, the value reached 60.27 Argentine pesos per US dollar. 

The pair rose to 84 Argentine pesos per US dollar at the end of 2020 and closed at 103 at the end of 2021. At the time of writing on 2 August, the USD/ARS stood at 131.89. The currency pair has gained 28.45% this year. 

The peso has continued to depreciate in line with accelerating inflation. Argentina's inflation spiked to 53.8% in 2019, from 47.6% in the previous year. The inflation cooled a bit to 36.1% in 2020 due to lockdowns during the pandemic, before spiking again to 50.9% in 2021. 

The monetary issue to finance the fiscal deficit accelerated inflation, according to the World Bank. 

What drives USD/ARS lately?

The USD/ARS has risen due to growing political infighting over how to deal with the escalating inflation crisis, clouding the country’s economic outlook. Inflation has reached 90% in the second largest economy in South America, which is grappling with high energy costs and fears of new debt defaults.

BBVA Research forecast that inflation would hit 95% this year and surge to 105% in 2023.

On 2 July, Argentina's Economic Minister Martin Guzman abruptly resigned. Guzman, who posted his resignation letter on his Twitter account, is the man behind Argentina's landmark $44bn deal with the International Monetary Fund (IMF).

On 25 March, the IMF approved a 30-month extended arrangement for Argentina worth $44bn under the Extended Fund Facility (EFF). 

Guzman was replaced by Silvana Batakis on 4 July who held the first meeting with the IMF on the programme on 26 July.

USD/ARS forecast: How will the pair perform in the future? 

Analysts polled by Argentina's central bank BCRA in their US dollar/Argentine Peso forecast expected the pair to average 159.59 pesos a dollar in December 2022, according to the central bank’s monthly Market Expectations Survey (REM) issued on 8 July. 

The exchange rate averaged 122.74 pesos a dollar and 128.23 in June and July, respectively, according to the report. 

REM surveyed 38 participants from local, international consultants and research centres as well as 12 financial entities. 

Economic data provider TradingEconomics in its USD/ARS forecast for 2022 expected the Argentine peso to trade at 131.73 pesos a dollar by the end of this quarter and 133.16 in 12 months’ time.

BBVA Research in its USD/ARS prediction expected the USD/ARS to average 170 per US dollar in 2022, rising to 316 in 2023.

BCRA has been struggling to purchase US dollars to fill its international reserves target set under the EFF programme with the IMF. According to BBVA Research, in the first half of this year, the central bank purchased only 29% of the reserves it had acquired in the first half of 2021. 

BCRA, Trading Economics, and BBVA Research did not provide long-term USD/ARS forecasts.

Algorithm-based WalletInvestor provided up to five-years US dollar/Argentine Peso forecast using the currency pair historical prices.

The forecasting service expected the USD/ARS to trade at 141.233 pesos a dollar in December 2022. In its  USD/ARS forecast for 2025, Wallet Investor expected the currency pair to trade at 212.531 pesos in December 2025, rising to 250.02 in July 2027. The service did not offer a USD/ARS forecast for 2030. 

Bear in mind that analysts’ and algorithm-based USD/ARS forecasts can be wrong. They shouldn’t be used as a substitute for your own research. Always conduct your own due diligence before trading. And never trade money you cannot afford to lose.

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