US Dollar-Philippine Peso Retests Its All-Time High of 59, the BSP’s "Maginot Line": It’s Not About the Strong Dollar

  

interventionism destroys the purchasing power of the local currency by breaking all the rules of prudent monetary policy and financing an ever-increasing government size printing a constantly devalued currency—Daniel Lacalle

US Dollar-Philippine Peso Retests Its All-Time High of 59, the BSP’s "Maginot Line": It’s Not About the Strong Dollar 

Last week, the USD-Philippine peso retested its all-time high of 59, or the BSP's "Maginot Line," which they misleadingly attribute to the "strong USD." The historic savings-investment gaps translate into a case for a weaker peso. 

I. The USDPHP Retest the 59 ALL Time High Level; The "Strong Dollar" Strawman 

The US dollar-Philippine peso exchange rate $USDPHP hit the 59-level last Thursday, November 21st—a two-year high and the upper band of the BSP’s so-called "Maginot Line" for its quasi-soft peg. The Bangko Sentral ng Pilipinas (BSP) attributed this development to the strength of the US dollar, explaining: "The recent depreciation of the peso against the dollar reflects a strong US dollar narrative driven by rising geopolitical tensions…The peso has traded in line with the regional currencies we benchmark against."

Figure 1 

To validate this claim, we first examine the weekly performance of Asia's currencies. While the US Dollar Index $DXY surged by 0.8% this week, most of the gains were driven by the euro's weakness.  (Figure 1, upper window) 

Among Bloomberg’s quote of Asian currencies, 8 out of 10 saw declines; however, the Thai baht bucked the trend and rallied strongly, while the Malaysian ringgit also closed the week slightly higher. (Figure 1, lower graph) 

The US Dollar averaged a 0.4% increase against Asian currencies this week. 

However, the strength of the Thai baht and Malaysian ringgit contradicts or disproves the idea that all regional currencies have weakened against the USD.

Figure 2 

A second test of the claim that a "strong dollar is weighing on everyone else, therefore not a weak peso" is to exclude the US dollar and instead compare the Philippine peso against the currencies of our regional peers: the Thai baht $THBPHP, Malaysian ringgit $MYRPHP, Indonesian rupiah $IDRPHP, and Vietnamese dong $VNDPHP. (Figure 2) 

From a one-year perspective, the Philippine peso has weakened against all four of these currencies, providing clear evidence that its decline was not limited to the US dollar but extended to its ASEAN neighbors as well. 

Ironically, the same ASEAN majors have recently joined the BRICS. Have you seen any reports from the local media on this? 

The $USDPHP ascent to 59 has been accompanied by a notable decline in traded volume and volatility, suggesting that the BSP has been "pulling out all stops" to prevent further escalation. 

This includes propagating to the public the "strong US dollar" strawman. 

II. BSP’s Interventions and the Case for a Weaker Peso: Record Savings-Investment Gap 

Figure 3

Since the BSP is among the most aggressive central banks engaged in foreign exchange intervention (FXI), it can surely buy some time before the USDPHP breaks through this upper band and tests the 60-level. (Figure 3) 

We have long been bullish on the $USDPHP for the simple reason that the historic credit-financed savings-investment gap (SIG), manifested primarily through its "twin deficits" (spending more than producing), translates to diminished local savings. 

This, in turn, means more borrowing from the savings of other nations to fund excessive domestic consumption. 

Accordingly, the SIG is inherently inflationary, which results in the debasement of the purchasing power of the peso—an indirect consumption of the public's savings. 

In any case, the USD Philippine Peso exchange rate ($USDPHP) should be one of its best barometers and hedge against inflation (Prudent Investor, April 2024) 

In other words, since there is no free lunch, someone will have to pay for the nation’s extravagance.

Figure 4

The Philippine external debt's streak of record highs coincides with the pandemic-era deficit spending levels. Apparently, this stimulus suffers from diminishing returns as well. 

This is apart from the BSP’s financial repression policies or the inflation tax, which redistributes the public’s savings to the government and the elites. 

Such capital-consuming "trickle-down" policies combine to strengthen the case for a weak peso. 

Yet, the continued rise in external debt indicates that the Philippines has insufficient organic US dollar resources (revenues and holdings), despite the BSP’s claims through its Gross International Reserves (GIR). 

To keep this shorter, we will skip dealing with the BSP’s GIR and balance sheet. 

Nonetheless, rising external debt compounds the government’s predicament, as the lack of revenues necessitates repeated cycles of increased borrowing to fund gaps in the BSP-Banking system’s maturity transformation, creating a "synthetic US dollar short." (Snider, 2018) 

As a result, the country becomes more vulnerable to a dollar squeeze. 

Hence, the BSP hopes that, aside from cheap credit, loose monetary conditions will prevail, allowing them to easily access cheap external funding. 

However, by geopolitically aligning with the West against the Sino-Russian-led BRICS, the Philippines increases the risks of reduced access to the world’s savings. 

As an aside, the Philippines attempts to mimic the United States. However, because the US has the deepest capital markets and functions as the world’s de facto currency reserve, it has funded its "twin deficits" by absorbing the world’s "surpluses"—the "exorbitant privilege." 

Unfortunately, not even the US dollar standard, operating under present conditions, will last forever, as it fosters both geopolitical and trade tensions. 

III. USDPHP: Quant Models and the Lindy Effect

Figure 5

We are not fans of analytics based on exchange rate quantitative models such as the Deviation from Behavioral Equilibrium Exchange Rate (DBEER), the Fundamental Equilibrium Exchange Rate (FEER), and Purchasing Power Parity (PPP), but a chart from Deutsche Bank indicates that the Philippine peso is among the most expensive world currencies. 

Needless to say, all we need is to understand the repercussions of free-lunch policies. 

People have barely learned from past lessons. The USDPHP remains on a 54-year long-term uptrend, even after enduring episodic bouts of financial crises—such as the 1983-84 Philippine debt restructuring and the 1997-98 Asian crisis. 

The sins of the past have been resurrected under the alleged auspices of "this time is different; we are doing better." 

Following the Asian Crisis, a relatively cleansed balance sheet allowed the peso to stage a multi-year rally from 2005 to 2013. 

Unfortunately, we have since relapsed into the old ways. 

Because the elites benefit from the trickle-down policies, there is little incentive for radical reform. 

The "strong US dollar" only exposes the internal fragilities of a currency. 

Therefore, trends in motion tend to stay in motion until a crisis occurs. 

The USD-PHP seems to exemplify the Lindy effect: the longer a phenomenon has survived, the longer its remaining life expectancy. 

___

References

Prudent Investor, Navigating the Risks of the Record Philippines’ Savings-Investment Gap, February Public Debt Hits All-Time High and March CPI Reinforces the Deficit-CPI Cycle Tango April 8, 2024

Jeffrey P Snider, The Aid of TIC In Sorting Shorts and Shortages, October 17, 2018

Chart of the Day: Gold Prices in ASEAN Local Currency Rarin' for a Breakout!

Despite falling USD-ASEAN currencies (PHP, MYR, THB, IDR, VND & SGD), gold prices in 5 of the region’s largest members (in local currency units) seem rarin’ for an upside breakthrough. (Philippines, Malaysia, Thailand, Indonesia, Vietnam, and Singapore)

Oh, Gold!!!!

Gold (Gold)

Always believe in your soul

You've got the power to know

You're indestructible, always believe in, 'cos you are

Gold (Gold)

I'm glad that you're bound to return

There's something I could have learned

You're indestructible, always believe in

—Spandau Ballet (1982)

Oh, Gold!!!!

The financial media have recently bannered unprecedented heights attained by major equity benchmarks of developed economies. The adrenalin rush, however, overshadowed the feat of a critical financial asset: gold.

Of a few establishment media that carried gold, the CNBC reported: Gold jumped more than 1.5% on Friday to its highest level in seven years as investors rushed to the metal’s safety due to concerns over the global economic fallout from the fast-spreading coronavirus. 

 

Up 1.75% on Friday, February 21st, the (Chicago Mercantile Exchange) CME gold prices sprinted to a 7-year high to $1,648.8. For the week, gold was up by 3.93%, boosting year-to-date return to 8.93%.

Despite the spirited run, the USD gold has still been off by about 12.2% from 2011 high of $1,878.

The US financial media broadcasted the USD price of gold. But it did not cover the prices of the gold in OTHER currencies, where the action truly mattered.

What you are about to see is a defining monumental process in financial history!

Lo and Behold, Gold’s phenomenal rise against central banking’s Fiat Money standard!

Gold prices broke into ALL-TIME highs against almost all of the most traded currencies, in particular, the euro, the yen, pound, the Aussie dollar, the Canadian dollar, the Swedish krona, and the New Zealand dollar! Like the USD, gold is within breathing distance of overtaking its previous apex against the Swiss franc.

Like a pandemic, gold’s upsurge had almost been ubiquitous. Gold’s insurgency spread to the emerging markets. Please do note that this is not a one-time event, but a process represented by their underlying trends.

 

Except for China’s yuan where gold prices seem about to test its breakout point, gold has likewise forayed into uncharted territory relative to the major emerging market currencies led by the acronym BRICS, specifically, Brazil’s real, Russian ruble, Indian rupee, and South African rand!

Gold’s rebellion has spread even to ASEAN.

 

It’s a new zenith for gold prices in the Philippine peso!

Gold prices in Malaysian ringgit, the Indonesian rupiah, and the Vietnam dong have also reached fresh spectacular heights! Though lagging, like her peers, gold prices in the Thailand baht appears on the way to set a new record.

In a publication at the London Bullion Market Association (LBMA), the Philippine central bank, the Bangko Sentral ng Pilipinas (BSP), enumerated reasons for their gold reserves*: (bold mine)

The BSP holds gold for several reasons. First is for security purposes as it is a real asset and it is no one’s liability. Further, it is an attractive asset to hold during times of uncertainty as it is considered a safe-haven. Another reason is for diversification as it has a low correlation with other assets that the BSP manages. Still another reason is that investors prefer to own gold when inflation and inflation expectations are high as this precious metal is considered a hedge against accelerating prices. Finally, the BSP maintains a portion of its reserves in the form of bullion since the Philippines is a significant producer of gold.

*Joni Teves, Treasury Operations Officer, A Heart of Gold: Gold at the Heart of Bangko Sentral ng Pilipinas Reserve Management, Bangko Sentral ng Pilipinas LBMA

The near-simultaneous upside price actions of gold against almost every currency has signified a CONVERGENCE.

A convergence of or against what?

For the time being, to cushion the global economy from a slowdown, which is being intensified by the emerging coronavirus COVID19 pandemic, many global central banks appear to have been synchronizing financial easing policies by slashing policy rates (and) or by revving up on asset purchases (monetary inflation).

For instance, major central bank rate cuts from last year (2019) to date: Fed: -75 bps ECB: -10 bps Denmark: -10 bps Australia: -75 bps Brazil: -225 bps Russia: -175 bps India: -135 bps China: -26 bps Korea: -50 bps Mexico: -125 bps Indonesia: -100 bps Philippines: -100 bps Thailand: -75 bps Malaysia: -50 bps Turkey: -1325 bps.

In aggregate, a total of 22 rate cuts as of last week had been implemented by central banks across the world in 2020 alone!

But the negative real rates from these, intended to maintain and support current credit positions, as well as to boost its use, won’t be sufficient to fuel gold’s run. It’s the outcome from it vis-a-vis real economic forces that shapes the socio-economic climate.

Whether street inflation surges or not, in reaction to the massive supply-side disruptions from a crucible of real adverse forces in the face of central bank actions, the escalating uncharted experiments on monetary inflation have pointed to the magnification of uncertainty on a global scale.

In an interview with Ms. Gillian Tett at Council of Foreign Relations (CFR) on October 2014, former Fed chief Alan Greenspan aptly remarked:

Remember what we're looking at. Gold is a currency. It is still, by all evidence, a premier currency, where no fiat currency, including the dollar, can match it. And so that the issue is if you are looking at the question of turmoil, you’ll find as we always find in the past, it moves into the gold price.

The bottom line: Gold's uprising against central banking fiat currencies warn that the world is in the transition of entering the eye of the financial-economic hurricane!

Buckle up!

Has Phisix Peso Correlation Been Resurrected?

The local currency, the peso, it seems had partly been plagued by the fallout from last week’s geopolitical ruckus.

 

The Philippine peso and the Thai baht (-.75%) were the biggest losing currencies for the region this week.

The USD php rallied by a substantial 1.16% to 47.16 from last week’s 46.62.

In two weeks, the USD php rose by a hefty 1.73%. This week’s performance neutralized the previous year to date losses by the USD peso. As of Friday, the USD peso yielded .2%.

It would seem that the Phisix peso inverse correlation may have been resurrected.

In 2015 the correlation between the weak PSEi and the strong USD (weak peso) solidly played out for the entire cycle or from one inflection point (March April) to another inflection point (January 2016).

But after the turnaround in 2016 the correlation appears to have been broken. The PSEi soared by almost the same degree as with the 2014-2015 at only less than half the time from January through July. While the USD peso retrenched along with the initial surge by the PSEi, the USD peso stopped falling, began consolidating and ironically even rose along with the Phisix which raced to 8,102.

However since August the USD peso Phisix relationship appears to have been revitalized. 

 

Present dynamics has truly been interesting. That’s because of the contradictory numbers dished out by the government. The BSP declared that July GIRs have reached record highs. The irony has been that external debt appears to be rising along with GIRs. Besides, the BSP can’t seem to unload or unwind its FX derivatives which also have been adrift at near record levels. Has the BSP been stuffing its GIRs with even more borrowed or short ‘dollars’?

Has the BSP been puffing up its GIRs to portray G-R-O-W-T-H? If the answer is yes, then the peso will fall further. Add to these the coming explosive budget and trade deficits.