The Flailing US Dollar Index Fueled a Significant Rally of the Philippine Peso

The Philippine peso staged a powerful .59% rally against the USD, which forced a breakdown of 51 level last week. The peso has rebounded in two out of the past three weeks to accrue a substantial gain of 1.21%.

The conditions of the peso should be examined in the context of the broader picture.

The recovery of the peso emerged in the backdrop of a remarkable plunge in the USD dollar index (Bloomberg Dollar BBDXY -1.46%; Dollar Index spot DXY -1.6%)

Since the start of the year, the US dollar index (USD) had been plagued by depreciation. Such weakness has even accelerated over the past few weeks.

Falling 10-year US Treasury notes (or rising US bond prices) have accompanied the infirmities of the USD. Even more, US yield curve has been flattening too (see 10-year minus 2-year and 10-year minus 3-months).

And the weak US dollar has fired up its nemesis gold (+1.56% week on week)

It is possible the US President Trump’s fading approval ratings may have partially influenced the US dollar as alleged by some.

However, in the framework of US conditions, rising bond prices presage economic vulnerability which seems to have been reinforced by the flattening yield curve. Perhaps the markets could be anticipating the FED’s prospective easing.

Fascinatingly, US bonds and stocks have been emitting contradictory signals.

Additionally, contrasting policies by the US Fed and global central banks may likewise have contributed to the feeble US dollar.

As I earlier wrote*,

Moreover, the tsunami of liquidity thrown into the financial system by global central banks has limned a scenario of significant improvements in the global economy. This impression of growth has reduced perceived strains in the system, thus, has partly fed into the dumping of the USD dollar!

*More on Drowning in Debt: BDO, Ayala Corp, San Miguel and Subprime Emerging Markets September 10, 2017

The surge in US dollar borrowings here and in emerging markets and the synchronous race for yields manifested in the milestone or near record highs of many stock market benchmarks in the Asian Pacific region and the world has mainly been a consequence of a perceived easing of global financial conditions.

US stocks have ingested this position.

This perceived easing of global financial conditions has only intensified this week as manifested by strengthening of Asian currencies.

With the exception of the South Korean won, the entire spectrum of the Asian currencies quoted on Bloomberg registered gains.

The US dollar fell most against the Malaysian ringgit (-1.77%), Singapore dollar (-1.22%), Chinese renminbi (-.98%) and the Indonesian rupiah (-1%). The Bloomberg-JP Morgan Asian Dollar (ADXY) index surged by .47%. (lower window)

On a year to date basis, with the exception of the peso (+2.31%), the US dollar has fallen against ALL Asian currencies. The ADXY has been up by 6% which reflects the degree of gains enjoyed by most of the currencies in the region.

And no, this has not been about the August Gross International Reserves.

The increase in August’s $448 million GIR has mainly emanated from “revaluation” or increases in gold prices (+$427.8 million). The irony of the reserve data stems from the fact that the increase in gold prices came with the fall of the USD index!

Yet, the USD rose against the peso over the said period.

The other contributor to the increase in GIR has been in Foreign Currency assets (+$310 million), which may be about derivatives that offset the decline in Foreign Investments (-$286.3 million). The once little-used forex segment of the reserves has spiked anew to record highs as the peso plunged.

On a year on year basis, the August GIR registered a hefty 4.99% fall.

The broad based weakness of the US dollar has provided a fleeting camouflage to the BSP’s debasement of the peso through record debt monetization.