Is the USD-Php 59 the BSP’s Maginot Line? Are Speculators to Blame? GIRs Fall USD 13.8 Billion in 9-Months!

  

For all the glamour, players in the currency markets get by on hard work and tough analysis. Before speculators place their bets, they try to figure out the answers to key questions like, Is the central bank acting responsibly on monetary policy? Is the government allowing social spending to spin out of control beyond the means of the taxpayers? Are the politicians honestly portraying the country’s ability to meet its debts? If the answer to any of these questions is no, the currency traders will swoop down and dump the nation’s currency until leaders deliver honest answers—Todd G. Buchholz 

 

Is the USD-Php 59 the BSP’s Maginot Line? Are Speculators to Blame? GIRs Fall USD 13.8 Billion in 9-Months! 

 

Speculators become the convenient scapegoat once buffers run low and when the other goal is to save face. 

 

Strong Dollar? Peso Falls against the Yuan and Rupee; Gold-Php Nears ALL-Time Highs!  

 

Figure 1  

When the USD Php first touched the 59-level in the last week of September, the media disclosed that the political leadership "closely monitored" the unfolding events, which implied a warning to the public. 

 

After repeatedly attempting to cross this threshold level, last week, the BSP warned speculators:   

 

Businessworld, October 5: THE BANGKO Sentral ng Pilipinas (BSP) on Tuesday warned currency speculators not to take “undue advantage” of the Philippine peso, which has slumped to a fresh low against the US dollar on Monday. The Philippine peso closed at P58.65 per dollar on Tuesday, gaining 35 centavos from a record-low P59 a day earlier. 

 

Why pass the blame for the faltering peso on speculators than on their policies? 

 

First, hasn't this dilemma allegedly been about a "strong dollar" and not because of the "weak peso"? 

 

Next, what happened to the supposed "decoupling," which had been advocated by the consensus? 

 

Compared to its "fiat" currency peers, the peso has been "weak" not just against the US dollar but relative to the Chinese yuan and the Indian rupee.  Yet, both Asian currencies also experienced sharp depreciation.  

 

The peso has been rangebound compared with the euro.   

 

But yes, it is "strong" compared to embattled currencies, the UK sterling pound, and the Japanese Yen.  

 

From here, the peso's performance has been relative to the conditions of its currency pair.  Called the "contrast effect," the peso is "strong" against the weakest currencies but "lags" the relatively stronger one even when all have depreciated against the USD.   

 

It would be inaccurate to conclude that the peso is not weak against others.   

 

But here's the zinger.    

 

USD prices of gold have not been immune from the mounting scarcity of the USD and thus have likewise been on the receiving end of the selloff.  

 

But gold prices in the peso have been adrift at record highs!  

 

It even broke out of its symmetrical triangle pattern, indicating a momentum that could push for a test of the April 2022 All-Time high!  

  

With gold-Php lingering in proximity to the recent milestone, this highlights the frailty of the peso against a commodity previously used as money!  

  

On this score, gold in the peso has manifested the implicit devaluation policies of authorities! 

 

No. It is not that the US dollar is "strong."  It is instead about how a scarce USD exposes the embedded imbalances through a "weak" peso. 

 

BSP’s First Maginot Line: USD-Php 59? 

 

Nonetheless, the 59-level might be the BSP's initial Maginot line. 

 

Figure 2 

Why so? 

 

The BSP has opted to use its "reserves" than aggressively raising domestic interest rates.  But alas, the BSP's vaunted reserves have been thinning fast because of this! 

 

Since cresting at USD 108.8 billion last December 2021, its Gross International Reserves (GIR) have diluted to USD 95 billion in September 2022.  To defend the peso, it used up about USD 13.78 billion of its GIR in 9-months, or it has exhausted about half of the amount it amassed to reach its milestone highs since 2018!   

 

As repeatedly stated, since 2018, Other Reserve Assets (ORA), which included financial derivatives, short-term currency loans, repo assets, and more, became part of the toolbox of the BSP in expanding its GIR.  (Source: IMF International Reserves and Foreign Currency Liquidity, IRFCL) [figure 2, upper window] 

 

From about 2%, the share of ORA to GIR raced to a record 16% in December 2019.  

 

But perhaps rising rates and collateral issues have increased the cost of these instruments, which may have prompted the BSP to downscale its usage. The diminished use of the ORA has coincided with the spike of the USD peso. 

 

But ORA still accounted for 8.5% of the GIR as of August. 

 

Aside, the external debt has also bolstered the GIRs. 

 

That said, "borrowed reserves" or "USD shorts" paved the path to the record high in the BSP's GIR. 

 

Not anymore.   

 

With the recent ORA reduction, the composition of GIR has likely shifted to external debt.   

 

At any rate, FX reserves are limited. 

 

Blaming Speculators: Thinning FX Buffers May Prompt Authorities to Implement Various Controls 

 

But here is the thing.  

 

The draining of USD liquidity worldwide exposed the inflation of the peso relative to its USD holdings and the fragility of its "US short" positions. 

 

The growth of Net Foreign Assets (NFA) of the BSP and the banking/financial system have slowed significantly or even contracted in the last two months.  Other Deposits Corporation (ODC) represents the Financial Institutions. (Figure 2, lower pane) 

Figure 3 

Phiref rates have also risen with the USD-Php, exhibiting emerging strains in the interbank foreign exchange swap market. (Figure 3, upmost window) 

 

Recall that the BSP operates in a de facto US standard, where international reserves serve as an anchor to the growth of its domestic liabilities.  

 

In this case, the stagnation of the growth of the Net Foreign Asset (FX international reserve proxy of the BSP balance sheet) relative to the modest expansion in the domestic money supply indicates the inflationary bias of the BSP policies (zero bound rates and QE). (Figure 2, middle window) 

 

NFA contracted by .81% in August, while M3 expanded by 6.8% over the same period. 

 

The other interrelated or entwined manifestations of these developments are twin (fiscal and current account) deficits. 

 

So how is the above not a function of domestic economic and financial imbalances? 

 

The BSP has yet to publish an update on its balance sheet, where the last one was in March 2022. 

 

In any case, the dwindling FX buffers should translate to the push to seek access to more FX savings by authorities to narrow this gap. 

 

ChannelNewsAsia, October 6: The Philippine government has raised $2 billion from a three-tranche U.S. dollar bond deal, National Treasurer Rosalia de Leon said on Thursday, the first offshore debt issue by the Marcos administration. 

 

The initial influx may help strengthen the peso, but the increase in "USD shorts" eventually should lead to further attenuation.  

 

So aside from embellishing statistics and managing financial market prices, authorities are likely to widen the dragnet of various controls (currency, capital, trade, price and wage, and mobility) in a series of steps. 

 

Taken together, the plight of the peso should not be an isolated development.  The peso's fall represents the intertemporal ramifications of the BSP's monetary policies. 

 

And though oversold conditions may lead to a temporary rebound, the peso remains on a downward trajectory over the long term. (Figure 3, lowest window) 

 

As time goes by, the peso erodes the "decoupling" theme promoted by the establishment. 

 

Said differently, there will be no "decoupling" from global developments. 

 

Finally, though the BSP may blame speculators for political convenience and crucify everyone with controls, sadly, economic reality is not an option.