How can Milei "save himself"? Wall Street: The Argentine peso needs to "devalue by 20%, if he dares."

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The fate of the Argentine peso is becoming the key to whether the Milei administration can weather the crisis.

According to the latest report by Bloomberg, there is a consensus among Wall Street analysts that the Argentine peso is severely overvalued and needs to depreciate substantially in order to help the Milei government out of its current predicament.

Barclays Bank stated that Argentina’s real effective exchange rate needs to depreciate by as much as 30% to stimulate the economy, while StoneX and local brokerage One618 believe the peso is overvalued by about 20%.

Juan Manuel Pazos, chief economist at One618, pointed out that to meet the terms of the $20 billion agreement approved earlier this year by the International Monetary Fund (IMF)—namely, achieving an annual current account surplus of about $10 billion—the peso needs to reach an exchange rate of 1650 to 1700 per U.S. dollar, while Monday’s closing price was 1408. StoneX analyst Ramiro Blazquez also believes that an exchange rate of 1500 to 1600 pesos per U.S. dollar would be “more reasonable” for Argentina.

But for Milei, who is facing political pressure ahead of key elections, this is an extremely risky option.

Although economic logic points to devaluation, political reality has become a stumbling block for the Milei government. The market widely expects that it is almost impossible for Milei to allow a sharp weakening of the peso ahead of the crucial midterm elections in October, especially after the local election losses two weeks ago.

Recently, after Milei’s party suffered an unexpected defeat in local elections in Buenos Aires province, investor confidence in his government was shaken, triggering a sell-off of the Argentine peso. Previously, Wallstreetcn wrote that, in order to defend the exchange rate, Argentina’s central bank sold more than $1 billion of foreign exchange reserves in just three days.

Against this backdrop, any devaluation move that may spark price increases is tantamount to a political gamble. As One618 economist Pazos said: “After the election, the government will need to move in that direction—if they dare.”

Strong Peso: From Anti-Inflation Tool to Economic Burden

A strong peso and fiscal tightening were once Milei’s two pillars for stabilizing the economy and taming hyperinflation. This strategy achieved remarkable results in curbing inflation, as the country’s annualized inflation rate has fallen from over 200% a year ago to the current 33.6%.

However, analysts say the degree of overvaluation of the peso is growing, provoking unease in a country with a long history of depreciation and default.

The price of a strong currency is also becoming increasingly apparent. Reportedly, with the local currency inordinately strong, more Argentines are choosing to shop overseas; even Argentina, known for producing high-quality beef, has meat processors beginning to import beef, as it is more cost-effective than using domestic products. Meanwhile, fiscal tightening has to some extent constrained economic growth and thrown the economy into distress.

America’s “Helping Hand”: Cure or New Problem?

While the market is in turmoil, the Milei administration on Monday received strong support from the Trump administration. Wallstreetcn reported that U.S. Treasury Secretary Bessent pledged to provide Argentina with “all options for stability.” This statement pushed Argentine assets higher for a second consecutive day, with the peso up 3.8% on Tuesday and U.S. dollar bonds rallying across the board.

However, such external support could prove a double-edged sword. Economist Robin Brooks of the Brookings Institution commented on social platform X that Bessent’s remarks were “a big deal,” with the pledge alone enough to boost the peso without any actual intervention.

But he warned: “The problem is, this makes Argentina’s overvaluation issue worse, not better.” The prospect of U.S. support may boost demand for the peso in the market, instead making the goal of currency realignment even harder to achieve. More details are expected to be released after Milei meets with U.S. President Trump in New York.

Risk Warning and DisclaimerThe market carries risks, and investments should be made cautiously. This article does not constitute individual investment advice, nor does it consider the specific investment objectives, financial situation, or needs of any particular user. Users should consider whether any opinions, views, or conclusions in this article are suitable for their specific situation. Investment decisions made based on this article are at their own risk. ```