Peso Breakdown Myths: Neither the US Federal Reserve Nor the Stock Market Has Been Responsible

The breakdown of the peso has landed on the headlines of a major broadsheet. The USD php soared by .5% to Php 48.25 yesterday, and yes, to a seven -year high. (History is in the making!)

Except for the price levels and historical comparison, the Inquirer article has been laden with inaccuracies and myths. The article was limned to shift the blame on the peso’s woes to external events.

I have shown you yesterday how the peso was last week’s sore thumb. It was the sole loser in the region.

A better picture would be the year to date performance.

As one would note, even prior to yesterday’s breakdown, the USD advanced mainly against the yuan and the peso; with the USD rupee also moderately higher. The region’s currencies have mostly strengthened against the USD.

The point here is that there has been LITTLE, or even NO truth, that US rates have had a significant influence on the USD php.

Though the USD peso has been in an uptrend over the long term, it began its interim surge in mid-August.  

Again the emphasis here is to establish the fact that while foreign money has sold Philippine stocks over the past few weeks, net foreign selling was just part of the story.

That’s the BSP’s data on net foreign portfolio. As of end August, foreign portfolio was net positive to the tune of $427 million. In fact, net foreign flows accounted for US$2.08 billion year to date.

In short, the peso has already been weakening even when portfolio flows had been net positive in terms of BSP data.

On the other hand, in the context of the PSE, net foreign selling has occurred in six consecutive weeks through the end of September 23. Net foreign sales ballooned to about Php 7.5 billion in two consecutive weeks (September 2 and 6). But from here, net foreign selling has substantially eased.

In fact, yesterday’s 1.18% loss in the PSEi posted only Php 16.9 million of net foreign selling. This means locals were responsible for the decline. Hence the diminished marking the close!

And the thing here has been that while net foreign selling has ebbed, the peso crumbled at a much fasterrate!

Curiously, the PSE even rushed to explain the role of foreigners yesterday.

"We have been experiencing net foreign selling in the market in the past weeks but numbers show that this has slowed down following the recent meeting of the US Federal Reserve. Perhaps it is also an indication of fund managers locking in gains, as the PSEi has delivered double digit returns since the start of the year. Our economic fundamentals remain strong and this should continue to help corporate performance moving forward," said PSE President and CEO Hans B. Sicat.

Mr. Sicat explained, "Investors tend to put more value on macroeconomic developments and corporate fundamentals in assessing their investment positions and portfolios over the medium- and longer term. Developments on the local political front may be getting a lot of attention recently but we believe the story of the Philippine economy will remain to be the compelling driver for attracting investments

The PSE and the newspaper article seem to suggest that it has been inappropriate (or politically incorrect) for money managers to sell the most expensive stock market in Asia! For them, valuations don’t matter at all! The Philippines have attained nirvana thereby has been immaculate to imbalances and imperfections.

The bottom line: For now, the pesos’ predicament has neither been mainly about the foreign selling in the stock market nor about anticipated actions of the US federal reserve.

While macro conditions will play a role (particularly liquidity), the USD peso exchange rate will ultimately hinge on changes in the balance sheet, income and cash flows of the Philippine political economy. And a spendthrift leftist government heralds to a weak currency [Phisix 7,150: Prospects of a Strong Man Rule Sends Peso Tumbling, Why A Shift to the Political Left Will Mean A Weaker Peso May 1 2016]

Oh, do expect the BSP to intervene substantially. But when they sell USD to prop the peso, this entails of a tightening of the domestic liquidity. And this would adversely affect credit flows. So damned if you do, damned if you don’t.

Perhaps media will shift the blame to currency speculator George Soros (who was accused by the Malaysian government of being responsible for the Asian crisis)