Oh, have you seen how the PSEi was pumped yesterday? Like clockwork, immediately right after lunch, the afternoon delight went into operations. So from unchanged, the PSEi rocketed to .71% just right before the runoff. The marking pump brought the end of the day gains to .89%. This would have been larger considering huge pumps on SMPH and GTCAP, except that there had been offsetting forces. With US stocks on a meltup, more of this can be expected today.
It's more evidence how the stock market function of PSE has been lost and perverted. And in its place, a price fixing mechanism.
And a relevant lesson from artificiality can be seen below.
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The BSP reported that its November’s GIR position “stood at US$82.73 billion as of end-November 2016”.
But first the bad news: “This level was lower by US$2.38 billion than the end-October 2016 GIR of US$85.11 billion…”. Then the spin “…but higher by US$2.06 billion compared to the end-December 2015 figure of US$80.67 billion”
As always, there has been that itching need to compare with something to project the current state as still maintaining the G-R-O-W-T-H theme.
It’s the second month for GIRs to fall. And the decline had been from record highs. But this month was the second biggest month on month decline since January 2014.
Yet the reasons for the present conditions? Again, the BSP: “The decline from October to November was due mainly to outflows arising from the foreign exchange operations of the BSP, revaluation adjustments on the BSP’s gold holdings resulting from the decrease in the price of gold in the international market, and payments made by National Government (NG) for its maturing foreign exchange obligations. These were partially offset by the NG’s net foreign currency deposits along with the BSP’s income from investments abroad.”
Yes, GIRs fell mainly due to a big (US $ 2.131 billion) drop in foreign investments, and in gold ($726.9 million).
The lower gold position was most likely due to gold price adjustments. Gold prices plummeted by 7.7% last November.
But forex positions continued to spiral higher by $ 492.7 billion to reach another record amount at $4.22 billion (see below window).
The surge in forex positions reveals that BSP’s GIR have been increasingly tenuous.
As far back in December 2015, I was already suspicious of the sudden surge in forex positions. Back then I wrote*,
So time will tell if government’s GIR has been another hall of mirrors.
*Phisix 6750: Update on the Seven Reasons Why the PSEi is Headed South! Why The Popular Clamor for a Strongman Rule is a Bubble December 14, 2015 (Before its news link available online)
I obtained proof from the IMF that a segment of advertised reserves constituted nothing more than (forward book derivatives)*…
The BSP has about $3 billion of forward long positions in fx swaps mostly over a short term 1 month of maturity. I suspect that these forward positions could have represented hedges on US dollars acquired from swap markets (fx loans and securities) and which was sold on the spot markets to support the peso.
Again these (FX Swaps and forwards) derivatives do not represent “reserves” in the context of savings (Benjamin Franklin US dollars), instead they represent liabilities or future drains in reserves for the simple reason they are borrowed “US dollars”.
And also last month when the yuan was reportedly incorporated as part of the GIR by the BSP, I wrote*,
The intensity of the buildup of forex position can be seen not only in nominal US dollar figures (upper window) but also on year to year changes (lower left window).
Yes, RECORD buildup!
Forex positions have topped the November 2013 highs last March. From then, the BSP continued to pile on more. I believe that the BSP’s GIR position has been substantially window dressed. The GIR has been bolstered by forward book or derivatives (swap, options or forward hedges). The BSP has been borrowing pages from the China and other central banks who have used the forward book strategies to aggressively shore up their domestic currency.
*3Q RGDP 7.1%, Really? Government Revenues Increased by Only 3.01% as Spending and Deficits Surged! November 20, 2016
Today, it has been record upon record!
As I have been saying, what has been borrowed will have to be paid, thus, reserves that have been statistically spiffed up by borrowings will eventually have to fall.
Even the BSP admitted to this…“payments made by National Government (NG) for its maturing foreign exchange obligations”
For now, this has been about non-forex holdings or through GIR’s foreign investments positions
I believe that part of the extinguishment of foreign investments may have been channeled through the selling of US treasury holdings by the BSP, which I also pointed out here last month (see above—upper window).
That chart has only been as of September. And this has not yet been updated by the US government’s Department of Treasury’s TIC.
The likelihood is that the UST liquidations intensified as the peso weakened in October and November. And if I’m right, then this amplifies a USD liquidity drain for the BSP.
And yet while the BSP may have sold US treasuries to buy the peso, it has used forward book (derivatives) as seen in its continuing amassment or stockpile of record forex holdings to cushion the fall of reserves. And surely as the peso falls, the cost of hedging should rise. Global costs of wholesale finance or USD dollar borrowings through currency swaps continue to soar! (Bloomberg, December 5)
Eventually, intensifying competition or scramble for Benjamin Franklin US dollars around the world would entail prohibitive costs or could lead to an acute shortage. And this means that the BSP’s fx swaps, that constitute part of present reserves, will have to fall.
The real translation from the November report was that the BSP has engaged in massive interventions in support of the peso, hence, the sharp decline in foreign exchange reserves. Additionally, the decrease should have been larger if not for record forex positions.
Another insight here is that the cosmetics from the padding of statistics eventually will be unmasked. And it seems to have started.
I’m reminded of the taper tantrum in 2013 when so called “experts” shouted “Forex reserve! Forex reserve! Forex reserve!” like a charm used to combat and to exorcise (financial) demons out of the markets. Unfortunately, in a world of eurodollars, those reserves don’t play the role which had been intended.
The coming period or days will put to a test on the true health of the BSP’s GIR positons.
And more importantly, this provides more clues to the fate of the peso—the unfortunate principal victim of politics.
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