Yesterday, hours after the government announced its new and higher inflation targets for the coming years, the US dollar gained on the Argentine peso, reaching a new record and coming close to breaking through the 20 peso barrier.

The slide yesterday is consistent with a series of records that the dollar has been hitting against the peso in the recent weeks, with the AR $19.46 required to buy a US dollar at the close of business yesterday, marking the 10th consecutive day of depreciation for the peso. The 11 percent depreciation of the peso in December was about half of the total slide for 2017. On the first day of business in 2017 the dollar was worth 15.92 pesos, signaling a 22 percent nominal depreciation for the peso. The peso gained ground against the dollar in trading today, with the exchange rate at 18.64 pesos to the dollar according to the Central Bank.

Analysts have pointed to various factors to explain the increase in the nominal exchange rate. In addition to the traditional stampede for foreign currency that takes place in the Argentine summer months as tourism picks up, which boosts demand, reduced exports from the agricultural sector, as well as a general strengthening of the dollar around the world have been given as reasons for the sudden depreciation. The weakening of the peso has also been seen as an adjustment to an overvalued peso when considering the cumulative inflation this year

The new inflation targets and what it could mean for interest rates has also been taken into account by the market. “The exchange market is adjusting to the possibility of a reduction of interest rates by the Central Bank” said Juan Manuel Pazos of Puente, a financial consulting firm, to Télam. “When it seemed like everything was calming down, the announcement has sparked a reaction” said Puente’s head of Strategy.

The nominal exchange rates for the US dollar, Euro and Brazilian real all embarked on a sudden depreciation for the peso in the last month of the year. After a slow depreciation in the peso that peaked shortly before the August primaries, the rate remained relatively stable and underneath 18 pesos to the US dollar until December. Similar trends can be seen with the Real and the Euro.

While nominal exchange rates matter in terms of headlines, it is important to bear in mind that real exchange rates (adjusted for inflation both here and in other countries) are also important when it comes to seeing how imports and exports will react. As such, the real exchange rates calculated by the Central Bank also show a sudden depreciation of the peso against a basket of foreign currencies in December. Interestingly, the multilateral (taking a weighted average of major trading partners) and bilateral real exchange rates appear to be converging on the the values that they had the beginning of 2017 after the peso spent the second half of the year relatively overvalued compared to the first six months of the year. The United States, Eurozone countries and Brazil make up the bulk of Argentine manufacturing imports and exports, a criteria that the Central Banks uses to weigh its overall multilateral real exchange rate.

Where exactly exchange rate goes now will depend in part on what the Central Bank does at its next meeting on January 9 with interest rates. “If the rate is within the expectations that the market has set, the new floor on the exchange rate will be what it is today. If the rate is cut more than expected, then the adjustment in terms of exchange rate will be even more aggressive” said Pazos.