Behind the Furious Rally of the Philippine Peso

Last weekend I wrote, 

Yet we cannot discount any temporal relief rallies in both the peso and the treasury markets mainly due to interventions and secondarily from the interim RISK ON mode.

Remember Philippine treasury markets have not only been an illiquid market but have been tightly controlled by the government and their cohorts, the banking sector. I also expect the BSP to deploy some of their forex reserves rather than use the interest rate tool to keep the financial repression stimulus for the government ongoing.

The Philippine Peso mounted a fantastic (+1.33%) comeback the during the past 4 days.

This has been pillared by today’s whopping almost one percent (+.95%) run. The USD-peso chart above reveals of a seeming breakdown.

Mainstream media tell us that today’s export data and foreign flows has been the catalyst for the surge in the Peso

From the Bloomberg:

The Philippine peso strengthened to a one-month high as a report showed exports increased the most since 2010.

Overseas shipments in February rose 24.4 percent from a year earlier, the government reported today, compared with a revised 9.2 percent increase in January and the 16.6 percent gain forecast in a Bloomberg survey. Overseas investors have pumped $100 million into local stocks this month, taking inflows this year to $494 million, according to exchange data.

The peso advanced 0.5 percent to 44.533 per dollar as of 10:49 a.m. in Manila, according to Tullett Prebon Plc. The currency touched 44.475 earlier, the strongest level since March 11. One-month implied volatility, a measure of expected moves in the exchange rate used to price options, fell 15 basis points to 4.77 percent.

It has not been stated why a surge in exports should boost the peso. It was just rationalized or assumed in a post hoc manner that today’s export data from the Philippine government equates to the strength in the peso.

The above chart from the Philippine Statistics Authority reveals of the February jump in exports which has been led by electronic products which accounted for 40.6% of total exports.

Now if we look in the context of nominal US dollar trade where February’s huge jump accounts for $4.654.15 billion (preliminary), the 2014 data would look very less than impressive.

Why? For one, the level of February exports have not reached any new milestone highs. In fact, the February data has been lower than the level of exports during the third quarter of 2013 (red rectangle as superimposed by me on the chart of tradingeconomics).

What has really punctuated the supposed growth in exports has been the depressed export data of February 2013 (red arrow). This has made the February 2014 look outstanding. 

Thus, all the buzz on February exports has all been about the contrast principle—what you see depends on where you stand or what you compare with.

The Philippine government have not yet disclosed on the figures for February imports. So it is a curiosity to see why a supposed strong export growth (based on an statistical outlier) would influence the peso positively.

Yet if the growth of imports exceed exports then a trade deficit is in the order. Ceteris paribus, this isn’t peso bullish.

Nonetheless the recent ballooning of trade deficits have been offset by remittances and BPO proceeds—and as noted in the above report—the influx of money to chase extremely overpriced Philippine equities. The Phisix broke the 6,600 level to gain .64% today. Mania at its finest.

Yet since the peso’s meltdown during the third week of March, aside from last week’s raising of reserve requirements, the Philippine government seem to have been using the signaling channel to massage the Peso’s direction. Last week, the BSP reported “slower” statistical price inflation. Today aside from “strong” export data, the BSP reported positive FDI inflows. And as I previously noted above, the RISK ON environment has helped in the peso rebound.

But what has been largely ignored is that the BSP has been intervening to firm up the Peso. 

Two weeks back I wrote

Aside from the raising the reserve requirements ratio, given the wild intraday movements of the peso during the week, I deeply suspect that the BSP may have used anew forex reserves to defend the peso. 

My suspicion has been confirmed the Philippine forex reserve in March has indeed dropped, although by a margin.  

From the BSP:

This level was lower by US$0.7 billion than the end-February 2014 GIR of US$80.5 billion…The decline in reserves was due mainly to outflows arising from payments by the National Government (NG) of its maturing foreign exchange obligations, foreign exchange operations of the BSP, and revaluation adjustments on the BSP’s gold holdings and foreign-currency denominated reserves.

This simply proves my point that any improvement in the peso will have the BSP’s fingerprints on them.

Ironically, to my surprise, yields of local 10 year treasuries have yet to get caught up with the mania—surge in the peso and in the Philippine stocks, they should be declining along with the USD-peso. 

The BSP and the Philippine government has been applying direct interventions as well as indirect measures (via the Talisman effect) to influence the "managed" domestic financial markets. Unfortunately, unless they address the 30++% growth in the domestic money supply, the effects from the above will be evanescent.

Oh by the way, the Chinese government today reported a substantial decline in her merchandise trade for March 2014, specifically for y-o-y exports fell 6.6% and imports 11.3% (Guardian)! This is significant. China has been the Philippines second largest export market after Japan with a 14.7 share of overall exports.

And going to Japan, the largest export market for the Philippines (with a 25.4% share in February), the Japanese government raised sales taxes from 5% to 8% this April. Unfortunately the Japanese consumers have hardly used the prospects of the coming higher taxes to stack up on daily necessities, but instead they drove a binge on big ticket items. 

From Reuters: (bold mine)

Japanese consumers spent more aggressively on higher-priced items like art works in the run-up to the tax than Takashimaya had expected, based on its experience in 1997, President and Chief Executive Shigeru Kimoto told a news conference. 

For April, the retailer forecasts a 14 percent drop in sales, followed by a nearly 6 percent decline in May and then an almost 4 percent drop in the three months to August. 

If the said forecasts becomes a reality, then Asian exports will suffer huge declines. So with Philippine exports. 

Good luck to the bubble worshipers.