Scotland open the three-match series against the Pumas in San Salvador de Jujuy and Townsend sprang a surprise on Thursday by picking the Northampton Saints centre Rory Hutchinson at full-back.
With the exception of Watson, the coach said it was the strongest squad he could have chosen.
“We have everyone available apart from Hamish Watson who picked up a knock at the end of last week and is progressing well, but we didn’t feel it was a risk worth taking this weekend,” said Townsend.
“The fear at first was that he might have to leave the tour. But he has progressed well, and he’ll be re-integrated into training maybe by Friday. He’ll hopefully be available for next week.”
In Watson’s absence, Luke Crosbie has been selected at openside flanker in what will be his first start for the full Scotland team following an impressive performance as captain in the A international against Chile in Santiago last weekend. Rory Darge, who has been out since April with a knee injury, will provide back-row cover from the bench.
The selection of Hutchinson at full-back is an intriguing one. He has not played for Scotland for two-and-a-half years but has had a fine season with Northampton, albeit at centre.
With Stuart Hogg rested and Huw Jones injured, the uncapped Ollie Smith is the only player in the squad who plays full-back regularly for his club but he has not been selected for the first Test.
Damien Hoyland - who scored a hat-trick against Chile from the wing - can also play at 15 but was one of five players sent home this week as Townsend trimmed his squad for Argentina. The others were Matt Currie, Ben Muncaster, Johnny Matthews and Jamie Hodgson.
“It was a tough decision,” said Townsend. “But they’ve left a good impression, and Damien especially with the three tries and the way he worked in that game shows that he can play at Test level.”