Your life is an advertisement for your beliefs. You can never force it on anyone who isn’t interested. If they want what you have, they will come to you. Let your life be the evidence; let it speak for you—Emily Maroutian
In this issue
My Major Homerun: Philippine Peso Dives to RECORD 10 Year Low! Don’t Tell the Public That The BSP Has Pursued a Weak Peso Policy!
-My Major Homerun: Philippine Peso Sets Record 10 year Low!
-Denial of the Philippine Internal Problems Ensures of the Pesos’ Deeper Fall!
-Ssh! Don’t Tell the Public That The BSP Has Pursued a Weak Peso Policy!
-USD PHP Rounded Bottom Breakout Target: 59.45!
-Possible Barriers to USD Php’s Upswing; Buy USD Php Signal Reinforced!
My Major Homerun: Philippine Peso Dives to RECORD 10 Year Low! Don’t Tell the Public That The BSP Has Pursued a Weak Peso Policy!
My Major Homerun: Philippine Peso Sets Record 10 year Low!
Breakthrough History has indeed been in the making!!!!
The following headlines reaffirm on such direction:
Businessworld: Peso weakens to fresh 10-year trough, February 21, 2017
Times of India: EM ASIA FX-Asian currencies ease, Philippine peso plumbs 10-year lows February 21, 2017
And because markets signify a time-consuming process, evidence of such crucial changes will continue to surface as time goes by. And the critical-radical symptoms from such evolutionary process will not be confined to the local context, but likewise become evident in global dimensions.
However, the coming momentous events will hardly conform to popular domestic expectations.
The fate of the peso should be a prime example.
For those who have followed me through the years, one would have noted of my transformations: From the most ardent bull to the most ferocious bear on Philippine assets.
And since my ‘proselytization’, which have actually been premised on the transitional phases of the business cycle, I have not only accurately predicted the turnaround of the USD php in 2014, but likewise have consistently been projecting of the fall of the peso.
Here are select excerpts from my (now private) blog:
Thus the continuing credit boom will mean a weaker peso and significantly higher interest rates than the consensus expectations. Tomorrow’s fundamentals will materially be distinct from that of the yesterdays. Mull over how all these will impact earnings, economic growth, credit conditions and more.
(Prudent Investor Newsletter Phisix: Why Tomorrow’s Fundamentals will be Distinct from Yesterday March 3, 2014; USD Php 44.715)
So this means that for as long as the BSP permits the inflation of credit fueled asset bubbles, surging price levels compounded by deteriorating or massive expansion of debt conditions will persist to manifest on a corrosion of the much vaunted external conditions of the Philippine economy that will be expressed on interest rates and on the peso.
(Prudent Investor Newsletter Phisix: BSP’s Response to Peso Meltdown: Raise Banking Reserve Requirements March 31 2014; USD Php 44.815)
My crystal ball portends that the USD PHP in 2016 may hit 50 or may even jump past 50. USD Php 50 would be my end of the year target. At 50, the USD PHP would translate to an annual 6.02% gain.
Should a crisis (regional or global) surface, then the 56.45 high during October 13, 2004 will most likely come into picture. For the USD PHP to reach the 2004 level means that the USD will soar by 19.95% against peso.
(Prudent Investor Newsletter Phisix 6,575: Good Bye 2015: Year of Propaganda! Hello 2016: Year of the Grizzly Bears?January 11, 2016; USD PHP 47.27) [Before It’s News Link]
This is why I believe that the USD peso will eventually break the 50 level. And even more, the USD php will go on to breach the 2004 high of 56.45 in the fullness of time. It may be this year or it may be next.
Philippine Peso: Internal Dynamics As The Critical Factor; Why the Peso Will NOT Be Immune to External Forces January 22, 2017 (January 23, 2017: 49.87)
Perhaps I may not be alone in having accurately predicted of the peso’s historic travails. Although, of course, I will be glad and thankful to anyone who might be able to provide information of such fellow travelers—if there have been any at all.
For now, the peso’s 10-year low should serve as my victory lap!
Denial of the Philippine Internal Problems Ensures of the Pesos’ Deeper Fall!
It’s easy to see why peso bears would still signify a rare breed.
Popular rationalizations of the pesos’ downfall virtually showcase the prevailing mindset behind the current developments.
Media and the establishment experts have remained in DEEP DENIAL over the fate of the peso!
The pesos’ dilemma has been described as either impliedly an anomaly or as mainly influenced by external factors. The latter is known as the cognitive error called the self-serving fundamental attribution bias.
Here are several noteworthy examples
The BSP’s or official interpretation of the Peso at 10 year low (Businessworld) (italics mine): “For his part, Bangko Sentral ng Pilipinas (BSP) Governor Amando M. Tetangco, Jr. said in a text message to reporters after the peso opened at P50.08 against the dollar on Monday: “The peso movement this morning tracked the softness in most regional currencies, and was also driven by risk-off sentiment amid geopolitical concerns, especially in Europe.” “As you know the BSP does not target any exchange rate level, but we continue to watch out for excessive market volatility,” Mr. Tetangco added.
The BSP’s ‘self-serving’ attribution bias amplified by the establishment, from the Manila Times (italics mine): “The political uncertainty has definitely increased as the chances of a Marine Le Pen victory and the Dutch election got into full swing,” Greg McKenna, chief market strategist at CFD and FX provider AxiTrader, was quoted as saying in a report dispatched by Agence France-Presse…Land Bank of the Philippines market economist Guian Angelo Dumalagan said the peso weakened significantly as the dollar gained more appeal as a safe-haven currency amid political uncertainty in Europe and optimism ahead of President Donald Trump’s tax plan.
A unique perspective that partially and implicitly pins the blame on the BSP, from the Reuters/Times of India (italics mine):"The Philippine peso is weak because of a host of domestic reasons. These include strong imports resulting in further widening of trade deficit, ongoing equity liquidation by foreign investors," said Heng Koon How, senior FX investment strategist at Credit Suisse in Singapore. The drop in the peso gained momentum after it slipped beyond the 50.00 per dollar threshold on Monday, breaching a support level that had held since late November. Some market participants say the peso's drop this week was probably partly the result of an apparent softening in the central bank's efforts to curb the peso's weakness
And the peso as a product of bad sentiment, back to the Businessworld: “Meanwhile, another trader attributed the peso’s continuous slump against the dollar to a “very bad sentiment driven by no particular reason.” “Sentiment in the Philippine peso is not that good at the moment,” the trader said. “Over the past two weeks, other currencies have not been that weak against the US dollar but the peso, it’s like it’s moving by itself weaker against the US dollar so investors have not so much interest right now in the Philippines.”
As one can see, except for the Reuters quote, the mainstream has anchored the pesos’ predicament largely on eitherignorance or on deliberate disinformation.
Figure 1: Peso as the Odd Man
With the exception of the Philippine peso which had been quoted at official rates, all Asian currency quotes above emanated from Bloomberg (Friday close).
As one would note, the attribution to the so-called external forces/factors has affected ONLY the Philippine peso!
The peso was the WORST performer over the week, as well as, in the context of year to date returns! (see figure 1)
The upward thrust of Asian currencies has even been reflected on Bloomberg-JP Morgan Asian Dollar Index ADXY (lowest pane)
And external forces (Europe, Fed and risk OFF) were supposed to have impacted the region!
Duh!
And yet haven’t we been repeatedly told, or even perhaps lectured, that the Philippines would be the least impacted by external forces, in particular, Trump’s policies?
Perhaps, because Mr. Trump’s policies have not yet been in place??? Or will Mr. Trump’s much feared policies, when turned into reality, aggravate current conditions??
As for the excuse of risk off sentiment—just where exactly has these been happening???
Have record streaking stocks not been the rage in the US, in UK, and in Asia’s Bangladesh, Pakistan or Vietnam??? How about near record highs of stock markets of Germany, India, Australia, New Zealand Taiwan, and Indonesia??? How about 52 week highs in stock markets of Japan, Hong Kong, Korea, Singapore and Thailand???
Those strong Asian currencies, which have been accompanied by rampaging bulls in the aforementioned stock markets, has accounted for as “risk off”??? Really???
Duh!
How about “bad sentiments”? How realistic would it be for people who wake up on the wrong side of the bed suddenly decide to sell the peso and buy US dollars??? How sensible will be for people who have been harried by family problems suddenly decide to sell the peso and buy US dollars???
This is the kind of logic that has dominated conventional thinking.
Others implicitly or directly impute the current leadership as mainly responsible for the sentiment that hounds the pesos’ woes. There may be some reality that political uncertainties and risks could have played a significant factor, as I have pointed out late last year
The Duterte regime has very ambitious spending programs covering all aspects of government (bureaucracy, welfare, warfare and public works). This will compound on the financing needs by the government, which will be funded partly through the raising of taxes, and mostly through credit expansion and the monetization of spending by the BSP.
Such actions essentially underwrite the coming dramatic fall of the peso (regardless of what the FED does—or even if the FED embarks on another QE).
See As USD Peso Touched 50, a November 2008 Low and My Yearend Target, Pandemonium and Confusion Engulfed the Mainstream! November 27 2016
However, in reality, sentiment has been AGAINST the peso SINCE 2013!!! (see upper chart figure 2)
The USD peso climbed from the following numerical sequence (rounded): 41, 42, 43, 44, 45, 46, 47, 48, 49 and to present 50+. Had these people been asleep (ala Rip van Winkle) when the peso weakened from 2013-2016???
How can the present regime be solely responsible for the USD php’s rise from 40.5 to 46-47 in February 2013 to April 2016??? Time travel which produced a change in regime?
How about trade deficits? The Philippine trade balance had only begun to register sustained deficits since 2H of 2015. Prior to this period, the trade balance was largely positive or registered mostly surpluses. Yet the peso has been in decline even prior to the emergence of deficits. Does it take two years of trade deficits to get reflected on the peso?
And yet, even if the trade balance has been negative, the Philippine current account balance remains in the positive or in surplus. This shows that net income from abroad and current transfers has more than offset such trade deficits.
Of course, that’s if these government statistics are even reliable.
Ssh! Don’t Tell the Public That The BSP Has Pursued a Weak Peso Policy!
As for the BSP’s supposed softening of support, well the answer here is that there is NO such thing as a free lunch.
The pressure on the peso was so very much evident. Even when it became oversold in the aftermath of August to November run, the peso refused to strengthen materially as it had done in the past.
And ever since the USD php first hit 50, any pullback would be very shallow. Subsequently, there would be next attempts at 50—in fact, three failed attempts to break past 50, which seemed to have been “controlled” or deliberately “contained”.
Figure 2: USD Php Breakout, PBOC-Yuan Reserves
The USD php 50 acted like a wall or the equivalent to the French Maginot line. I suspected that the BSP has engaged in operations similar to China’s PBOC, which made used a combo of GIR sales and currency derivatives to support the yuan (see figure 2 below chart from Alhambra’s Jeff Snider).
And when the psychological cost of declining GIRs, as well as, the rising costs of hedges became apparent and burdensome, the markets simply overwhelmed the PBOC—the yuan tumbled. Besides, PBOC interventions operated like clockwork or in time intervals.
As I have pointed out here late January:
I suspect that the USD php 50 has accounted for the BSP’s Maginot line. Each time the USD peso hit the 50 level, the BSP may have intervened by selling waves of USD.
Like China’s PBoC, the BSP seems caught in a predicament. The BSP has been faced with a Hobson’s choice; either let the peso fall and maintain GIR levels, or support the peso and suffer the GIRs. Something will have to give.
See Philippine Peso: Internal Dynamics As The Critical Factor; Why the Peso Will NOT Be Immune to External Forces January 22, 2017
The above only reveals of such utter blindness to risks by the mainstream. And this has been indicative of the scale of lucid vulnerability/fragility of the Philippine economy/financial system to BLACK SWANS.
And equally stunning has been the myopia to the substance of BSP policies. The mainstream has hardly realized that the BSP has pursued policies to implicitly DEVALUE the peso!!!
Again a flashback. In 2013-2014 or in 10 consecutive months, BSP spurred bank credit boom that has led to a tsunami of liquidity via M3 30+++% growth! This incited a spike in real economy price inflation. The inflationary boom upset the economy’s footing which was compounded by a series of tightening measures embraced by the BSP.
The aftereffects of both the BSP tightening and post inflationary boom clearly rattled the economy. This became visible in 2015 through many key aspects: a slowdown in bank lending, a collapse in money supply growth, a deceleration in GDP while topline and earnings of listed firms stagnated.
Notably the peso stabilized in the 1H and weakened only when the BSP eased again the late half of 2015.
Apparently, having been PETRIFIED by the emergence of deflationary pressures and by insufficient government revenues, the BSP has reengaged in another series of silent or unannounced stimulus program.
Figure 3: Silent Stimulus: BSP’s Bond Monetization Program
The BSP monetized a massive over Php 250 billion of government debt from the banking system in 4Q 2015 to 1Q 2016! (see figure 3)
And yes, the BSP have been shown as doing it again (upper window)! The BSP acquired Php 347 billion of national government bonds in 2016*!
Yet has this debt monetization been because of the surge in 2016’s budget deficit???? Next week should be the scheduled report for the January budget 2017. However, as of this writing, the Bureau of Treasury has yet to issue the December or the yearend budget conditions for 2016! The silence has been incredibly deafening. Has the budget deficit ballooned by more than the November levels (or at Php 235.2 billion), hence the BSP action???
Fiscal deficits entail of greater government spending than revenues. If deficits are financed by debt (or future taxes) then it would NOT be inflationary. On the other hand, if deficits are financed by credit expansion (bank financed) or by monetization (central bank/BSP financed) then such would be INFLATIONARY! The latter equates to policies to indirectly DEVALUE the peso!
BSP’s definition* of Net Claims on Central Government consist of domestic securities issued by and loans and advances extended to the national government (NG), net of NG deposits”
*Bangko Sentral ng Pilipinas Depository Corporations Survey December 2016
Back to monetization of 2015-2016 government debt.
The flooding of reserves from such BSP operations induced another wave of credit expansion binge in the banking system.
And to back this up, the BSP used the newly implemented interest corridor as cover to lower interest rates to record level!
The intense bloating of the balance sheets of both the BSP and the domestic banking system has clearly revealed of the effects of stimulus, which of course, sprung from RECORD loans to the private sector.
This revitalized or reenergized an inflationary boom (see the rise in CPI which has coincided with BSP’s debt monetization)!
Now even government’s non-CPI inflation measures have either topped or equaled the heights of 2013-4 or the post 30+++% M3 growth era!
And because of BSP credit easing policies, the Philippines run the hottest money supply growth rate in Asia!
Based on M2, December 2016 clocked in at 13.0% (↓)! China runs second at 11.3% both in December 2016 and January 2017. Indonesia 10% December 2016 (↑) took third spot. Singapore 8.0% (↑), Australia 6.9% (↑), Korea 6.6% (↓), Thailand 4.2% (↓), Taiwan 3.4% and 4.1% in December 2016 and January 2017 and Malaysia 3.0% December (↑)
Meanwhile, India suffers from monetary deflation -12.9% January 2017 and -17.6% December 2016 in response to its insane demonetization program last year. The rupee now suffers not only from deflation but from the integrity of their currency.
**arrows indicate directional change of rate from previous month.
This reveals that the Philippines’ money supply growth has almost been twice (or exactly 83.1%) the rate of the US! Should this not be the fundamental reason why the peso should fall???
And economic “experts” have no sense of understanding of the relationship of money supply to the price of the peso?
And given another wave of debt monetization stimulus appears to be at work, then domestic money supply should simmer even more! This should imply a further weakening of the peso, especially if the FED increases interest rates.
And with reference to the FED, the difference has been that the Philippine BSP has forcibly been loosening its financial conditions to subsidize the government, which on the other hand, the US FED appears to limit!
But a FED hike in March would hardly be the case. The probability of rate hike has not been high enough to suggest of its imminence.
And this must be why the risk ON in most Asian currencies and stock markets!
So regardless whether the FED hikes or not, the peso should fall.
And by confusing statistics with economics, “experts” pretend to talk economics. Yet, again, they seem to have forgotten of the elementary function or of the relationship of demand and supply to the price of the Philippine peso.
And because they have no clue to what’s going on, they simply reason from price changes! Furthermore, because of built in bias to promote the credit financed boom boom boom redistribution scheme status quo, the public is being misled and bamboozled with fake economic theories.
And the above only reveals that while the BSP purposely expands credit (thereby leading to relatively outsized money supply growth) which results to a weak currency, they ironically indulge in fictitious and superficial ways to defend the peso (GIR+ derivatives)—which looks all for show.
In short, it’s either the left hand does not know what the right hand has been doing (!) or that the BSP hasn’t been telling the truth!
Since there is no free lunch, again, the nasty consequences of the massive credit expansion and the BSP debt monetization will be ventilated on the PESO.
Yet this analysis precludes the influence of global US dollar shorts on the peso.
USD PHP Rounded Bottom Breakout Target: 59.45!
And even from the chart perspective, the critical breakout from the massive 9 year rounding bottom by the USD phpsignifies an ominous sign for the domestic currency, the peso
All bold highlights mine.
From Investopedia: Rounding bottoms are found at the end of extended downward trends and signify a reversal in long-term price movements. This pattern's time frame can vary from several weeks to several months and is deemed by many traders as a rare occurrence.
More from stockcharts.com: Bullish confirmation comes when the pattern breaks above the reaction high that marked the beginning of the decline at the start of the pattern. As with most resistance breakouts, this level can become support. However, rounding bottoms represent long-term reversal and this new support level may not be that significant.
The target from the breakout from TradingSim.com: But the question we all want answered is, how much higher? The simple answer is the move higher will be at least the size of the rounding bottom formation. To measure the potential of your rounding bottom, you should first identify the neck line of the pattern. To do this you should draw a line across the top of the bearish trend and the bullish trend before the breakout occurs. Then take the distance between the neck line and the lowest point of the pattern. This distance is the size of the rounding bottom pattern.
Since the distance between the neckline (50) and the lowest point (40.5) is 9.5, then the target given by the rounded bottom would be USD php 59.5.
While I am not an avid chartist or a fan of charts, the rounded bottom perspective essentially squares with my previous outlook (January as indicated above):
This is why I believe that the USD peso will eventually break the 50 level. And even more, the USD php will go on to breach the 2004 high of 56.45 in the fullness of time. It may be this year or it may be next.
All of which depends on the degree of inflationism, and the rate or scale of deterioration of domestic balance sheets of the government and of the banking system. And how such local dynamics will playout in face of the US dollar shorts, or at worst, a global crisis
Possible Barriers to USD Php’s Upswing; Buy USD Php Signal Reinforced!
What should likely stop the USD php from rising?
Well, over the long term, the BSP would have to wring out excess money supply by aggressively tightening. The BSP can do this via interest rate channel (raise rates) or via money supply curbs on the banking system (hike reserve requirements, institute direct loan caps and etc…). But this will collapse a substantial segment of the economy that has become acutely addicted to sustained infusions of gargantuan doses of credit. And this will destabilize a political system that has equally become deeply hooked to easy money subsidies.
So this would hardly be a political option.
But markets have always contrived ways to eventually deliver such an imbalanced environment either through recession or economic/financial crisis (bubble bust), or through a currency crisis (hyperinflation).
On the other hand, perhaps the US Federal Reserve may open a secret FX swap arrangement (through their intermediaries) with the BSP to supply the latter with USD. This may have been the recent case with Brazil.
But this would signify a stopgap measure that fails to address the structural maladjustments being entrenched within the system.
Final note:
For now, the BUY signal on USD Php has only been REINFORCED.
In addition, the USD Php has typically run in the opposite direction of domestic stocks. However, because of sustained flagitious price fixing and market manipulations, this relationship has become wobbly and inconsistent, of late.
Of course, price fixing shows of the emergence of unnatural or artificial market relationships. This means present conditions are susceptible to the market’s tendency to clear imbalances, even when coursed through disorderly means—a mean reversion
But this all depends on BSP’s actions. Like in Venezuela and Zimbabwe, stocks can fly to the firmament as a function of the collapse of the currency (Venezuela’s bolivar and Zimbabwe’s defunct Zimbabwe dollar) due to intensification of the monetization of government spending.
While Zimbabwe and Venezuela’s conditions have been far from the Philippines, ultimately, the GENERAL DIRECTION of PRESENT policies will matter or will determine future outcomes. Yet through debt monetization, the BSP has already opened the Pandora’s box for a Venezuela-Zimbabwe scenario!
Decisive history is in the making!
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