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.
