Argentina Hikes Rates to 40pc

The thesis here is that the dollar collapse begins with deflation and hyperinflation in emerging markets as the system collapses from periphery to core. The U.S. dollar is artificially strong because it is the reserve currency, but it has inverse properties with respect to economic expansion. Economic growth requires rising money supply and the dollar is a credit money. Expansion causes dollar creation, a short position in USD (depreciation versus other currencies) and recession causes repayment and default (appreciation versus other currencies). (The whole system is depreciating against real assets.) The dollar will not be replaced as a reserve currency until there are alternative monies that can replace the dollar and carry out all its functions.

Some nations such as Iran, Russia and China have a political desire to move away from USD because USG uses it as a geopolitical weapon. However, there is no pressing economic need for a dollar alternative if the dollar is functioning, aka inflating. Almost everyone wants inflation. Many countries want to inflate more than the USD and they try to stop their currencies from appreciating during global expansion cycles. Necessity is the mother of invention. When would a dollar replacement be needed? During a depression, when credit contracts and money becomes scarce. (Millennials are creating cryptocurrency instead of creating USD through a mortgage).

A rapidly inflating USD would be welcomed by the world. It would stave off a dollar alternative for another decade or two. If dollar credit growth doesn't pick up, then foreign currencies will depreciate in the next deflationary wave, the USD high for this cycle has yet to be hit, and its possible China could be the lynchpin for a wave of currency devaluations that cleans balance sheets and creates the conditions for dollar replacement in the next 10 to 15 years.

ZH: Argentina Hikes Rates To 40% To Stall Currency, Bond Market Collapse

The Central Bank of Argentina (BCRA) just hiked its 7-day repo reference rate to 40.00% - up a stunning 1275bps in a week - in a desperate attempt to stall the collapse of the peso (and ARG bonds) this week.

BCRA hiked this week three times:

4/27 +300bps to 30.25%
5/03 +300bps to 33.25%
5/04 +675bps to 40.00%

The central bank said it will continue to use all tools at its disposal to avoid disruptions in the markets and guarantee a slowdown in inflation. The bank is ready to act again if necessary, it said in the statement.

As The FT reports, appetite for Argentine assets has been waning in recent months as concerns grow over the country’s painfully high level of inflation and large trade and fiscal deficits. A severe drought is also complicating President Mauricio Macri’s efforts to revive Latin America’s third-largest economy. Agricultural exports are one of Argentina’s main sources of hard currency, but the worst drought in decades is expected to hit this year’s soybean and corn harvests. The country’s famed cattle industry is also predicted to rack up millions in losses.