King Canute Effect: Lagging Peso A Consequence Of Central Bank Intervention

For a while, we have been in a quandary about the status of the Philippine Peso, as the Peso has severely lagged the region in terms of performance.

Notwithstanding, based on conventional metrics, there doesn’t seem to be any persuasive parameters to argue for a stronger US dollar, especially under today's extraordinary loose or highly liquid environment.

We have argued in Not Just A Bear Market Rally For Philippine Phisix or Asia that ``The Peso’s woes can’t be about deficits (US has bigger deficits-nominally or as a % to GDP), or economic growth (we didn’t fall into recession, the US did), remittances (still net positive) or current account balances (forex reserves have topped $40 billion historic highs) or interest rates differentials (Philippines has higher rates)."

And we have ascribed the lag in the Peso to local central bank manipulation- out of political motives in order to paint a strong economy going into elections, as well as for a grand exit for the incumbent (if the election pushes through).

And possibly too, for the desire to keep the Peso down, as prescribed by our mainstream economic experts, who mostly tow the 'mercantilist' persuasion, to sustain the purchasing power of OFWs (who account for ONLY 10% of the economy at the expense of the rest).

Well, the idiomatic "cat is out of the bag". In anecdotal terms (not direct evidence), the BSP could have indeed been manipulating the Peso...

This from Wall Street Journal (emphasis mine),

``Many of America's trading partners, however, are pushing the other way. In Asia, traders said central banks in South Korea, Taiwan, the Philippines, Thailand, Indonesia and Hong Kong again intervened to slow the dollar's fall against their currencies.

``Asian officials fear that the dollar's fall could crimp their export-driven economies. "The [Thai] baht has appreciated a little too rapidly compared with our fundamentals," said Suchada Kirakul, assistant governor of the Bank of Thailand."

In other words, despite the interventions, the Peso's latest strength simply signifies as too much market pressure against the US dollar for the BSP (local central bank) to control.

Reminds me of King Canute (or Gnut the Great) who, according to a legend, ordered the ocean waves to stop advancing. (King Canute wanted to prove to the courtier- sycophants that his power is limited).

Lesson: Market is immensely larger and more powerful than central banks.