We argue that the erratic behaviour of the ARS will start impacting on financialstability and inflation expectations. The ARS depreciated more than 16% in nominalterms since the beginning of May 2017.    The market is demanding a higher premium to hold Argentine assets and BCRA isforced to deliver this. Carry no longer compensates for the expected political,fiscal, and external risk.    The peso is getting into oversold levels, though. Our models suggest that –ceterisparibus- the ARS should be ~17.10.    We deem it unlikely that the authorities engage into any aggressive and compellingFX intervention. Ammunition is not enough.    Even aggressively intervening, using reserves will not necessarily prevent aresumption of the selling pressure on the peso soon afterwards. Furtheradjustment of the interest rates (as it is already happening) would be the only wayout, in our view.    The damage, nevertheless, is already done: for a high-dollarized economy, itremains to be seen how much of the ongoing depreciation will be passed-throughdomestic prices.    Strategy: remain structurally long protection. Play opportunistically on the ARS dueto carry.

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