With the exception only of the 200-year period of the gold standard, practically all governments of history have used their exclusive power to issue money in order to defraud and plunder the people. There is less ground than ever for hoping that, so long as the people have no choice but to use the money their government provides, governments will become more trustworthy—Friedrich August von Hayek
In this issue
2026 Opens with USDPHP at Record Highs: The Peso Is the Symptom, Policy Is the Disease
I. 2026: The Peso at Record Lows, BSP’s Contradictory Stance
II. The USDPHP’s Suppressed Volatility
III. Media Agitprop and Be Careful of What You Wish For
IV. Lindy Effect: USDPHP’s 56-year Uptrend
V. Gold’s Rising Role in the GIR: Serendipity Saved Incompetence
VI. Inflation: Same Story, Different Mask
VII. Self-Poverty Ratings, Sentiment, and the Limits of Macro Optics
VIII. Employment Optics vs Labor Reality
IX. Deficits, Debt, and the Entropic Drift
X. PSE’s January 2026 Boom: Liquidity First, Fundamentals Later
XI. Conclusion: Record USDPHP A Symptom, Policies The Disease
2026 Opens with USDPHP at Record Highs: The Peso Is the Symptom, Policy Is the Disease
Gold-inflated FX reserves, suppressed USDPHP volatility, and the slow collapse of the BSP’s soft peg—symptoms of a deeper political problem.
Nota Bene:
For new readers, this post extends our earlier analysis and projections on USDPHP; please see the reference sections for our previous works.
I. 2026: The Peso at Record Lows, BSP’s Contradictory Stance
2026 opened with USDPHP printing its fourth record high, touching 59.355 on January 7, placing the peso at an all-time low. This comes after the pair decisively breached the 59 level in October 2025—a threshold that, in practice, had functioned as a de facto boundary since late 2022, or roughly three years.
Almost immediately, the Bangko Sentral ng Pilipinas (BSP) went public, stating it would not defend the peso, despite what it described as “tremendous pressure” to do so.
This posture echoed its statement following the October breakout, where the BSP asserted that it merely “allows” market forces to determine the exchange rate.
As we noted in a November 2025 post, such phrasing implicitly presupposes central bank supremacy over the market, implying that exchange-rate movements occur only at the BSP’s discretion—an assertion belied by the data.
II. The USDPHP’s Suppressed Volatility
Figure 1
Absent official confirmation, one is reminded of Bismarck’s dictum: never believe anything in politics until it has been officially denied. Circumstantial evidence points strongly to prior intervention. In the seven instances when USDPHP approached or touched 59 before October 2025, both trading volume and realized volatility consistently compressed—a pattern difficult to reconcile with a freely clearing market. (Figure 1, topmost and middle panes)
The same pattern has persisted after the breakout.
While the BSP has ostensibly “allowed” USDPHP to violate its three-year boundary, average daily trading volume has trended downward since mid-2025, and by early January 2026 had fallen back to levels last seen in late 2024. Combined with a persistently narrow intraday trading range, this has produced a marked decline in day-to-day price changes. Put bluntly, suppressed volume has translated into suppressed volatility—a classic signature of administrative smoothing.
III. Media Agitprop and Be Careful of What You Wish For
Predictably, much of the self-righteous media attributed the peso’s latest record low to a “strong” US dollar. Yet the DXY remains broadly range-bound near its 2022 levels, despite a modest rebound from its mid-2025 trough. (Figure 1, lowest chart)
The divergence is telling: USDPHP has been rising steadily since May 2025, even as the broad dollar index failed to make new highs.
Yes, the dollar strengthened this week, appreciating against seven of ten Asian currencies tracked by Bloomberg, and USDPHP—up roughly 0.7% on the week—was among the largest movers. But context matters.
Be careful what the establishment wishes for. Such agitprop risks becoming self-fulfilling.
The US dollar may indeed be attempting a cyclical rebound. Should that occur, it would likely coincide with a tightening of global financial conditions, making dollar funding scarcer and more expensive.
A stronger DXY would not cause domestic weakness—but it would expose internal fragilities that have been obscured by global easing.
This pattern is consistent with Minsky’s financial instability hypothesis. Repeated suppression of exchange-rate volatility creates the illusion of stability, encouraging leverage, fiscal expansion, and balance-sheet risk. The eventual adjustment does not arrive as a shock—but as accumulated fragility ventilated through the peso.
Figure 2
As we argued last November, USDPHP spikes rarely occur in a vacuum. Historically, they coincide with periods of economic stress. Using BSP end-of-quarter data: (Figure 2)
- 1983 debt crisis: +121% over 12 quarters (Q1 1982–Q1 1985)
- 1997 Asian Financial Crisis: +66.2% over 6 quarters (Q1 1997–Q3 1998)
- Dot-com bust (1999–2004): +30.6% over 20 quarters (Q2 1999–Q1 2004)
- Global Financial Crisis: +17.0% over 5 quarters (Q4 2007–Q1 2009)
- Pandemic recession: +22.6% over 7 quarters (Q4 2020–Q3 2022)
The current breakout, now coinciding with weakening growth momentum, fits this historical pattern uncomfortably well.
IV. Lindy Effect: USDPHP’s 56-year Uptrend
More importantly, the breach of the 59 level reinforces the USDPHP’s roughly 56-year secular uptrend. This can be viewed through Nassim Taleb’s Lindy Effect: not as a property of the exchange rate itself, but of the political-economic ideological regime that governs it. The longer a depreciation bias survives—across crises, cycles, and administrations—the more robust and persistent it proves to be.
This trend is therefore measured not merely by age, but by repeated survival—by the durability of the policies, incentives, and fiscal behaviors that continually reproduce it.
V. Gold’s Rising Role in the GIR: Serendipity Saved Incompetence
This context is essential when evaluating the BSP’s reported December 2025 Gross International Reserves (GIR) of $110.872 billion.
Figure 3
All-time-high gold prices played a decisive role in both the monthly and annual GIR outcome. Remarkably, the valuation gain on gold alone accounted for more than 100% of the roughly $4.6 billion year-on-year increase, while declines in foreign exchange investments exerted a drag on the headline figure.(Figure 3)
Figure 4
As a result, gold now represents its highest share of GIR in over a decade. This is especially striking given that the BSP was the largest net seller of gold in 2024, a move justified at the time as opportunistic monetization of high prices—and, more pointedly, on the argument that gold was a “dead asset.” (Figure 4, topmost and bottom graphs)
Ironically, the BSP has since been incrementally rebuilding its gold position at higher prices than those at which it sold.
As in 2020, gold once again served as a leading indicator. Then, large-scale gold sales—alongside increased national government’s external borrowing—were used to finance peso defense under a quasi-soft-peg regime. Once the proceeds were exhausted, borrowing constraints tightened, and usable FX reserves were drawn down, markets ultimately forced an adjustment: a weaker peso. (Figure 4, middle image)
Briefly, BSP gold sales foreshadowed the 2020 USDPHP spike—and a rerun appears to be unfolding.
Gold, however, is not equivalent to FX. It is less liquid in crisis: politically sensitive to mobilize, slower to swap into dollars, and volatile in mark-to-market terms. Markets understand this distinction—even if headline GIR figures do not.
Viewed counterfactually, had gold prices fallen in 2025, GIR would have declined materially, reserve-adequacy ratios would look materially worse, and narrative control would have been far more difficult. None of the reported strength reflects improved external competitiveness, durable capital inflows, or enhanced peso credibility.
Gold did not validate policy. It rescued the optics.
In that sense, the 2025 reserve story reveals something uncomfortable to the mainstream but unmistakable: serendipity saved incompetence.
VI. Inflation: Same Story, Different Mask
The government’s inflation narrative should feel familiar by now.
Last week, sections of the mainstream media began warning—belatedly—about the impact of peso depreciation on electricity prices. This is hardly new.
The Philippines’ recent inflation history has unfolded in distinct waves, each closely intertwined with the USDPHP.
Figure 5
During 2013–2018, the steady rise in USDPHP coincided with the first wave of inflationary upswing, which began building from 2015. The second wave in USDPHP (2021–2022) overlapped with the second inflation shock spanning 2019–2022, driven by global central bank easing, supply disruptions, energy prices, and domestic pass-through effects. (Figure 5, topmost image)
What distinguishes the two episodes is not the inflation spike—but the disinflation phase that followed.
From September 2018 to June 2021, USDPHP declined by roughly 11%, while CPI fell sharply from 6.7% to just 0.8%. As discussed previously, this period coincided with the BSP’s increasing reliance on Other Reserve Assets (ORA)—including derivatives, repos, and short-term FX borrowing—to manage the exchange-rate regime, a shift clearly visible in the GIR composition.
In the current episode, the adjustment mechanism has been fundamentally different.
Since first testing the 59 level in 2022, USDPHP has remained range-bound between 55 and 59, with no sustained appreciation. Yet headline CPI retraced materially—not because of currency relief or market forces, but due to a combination of:
- Demand destruction, now evident in slowing GDP growth
- Administrative price controls, including ₱20 rice programs and mandated MSRPs
- Distortions arising from these interventions, masking underlying pressures
- Composition and measurement effects, aligned with political incentives for easing—particularly amid ongoing bailouts of the energy sector, banks, and real estate
It was therefore no coincidence that a day before the October 2025 59-level breakout, the administration announced renewed price freezes, citing natural calamities as justification.
Despite these measures, December CPI rose to 1.8%, well above consensus expectations, lifting quarterly inflation from 1.4% in Q3 to 1.7% in Q4. Disinflation, it appears, has already begun to fray.
This erosion is further reflected in liquidity conditions. Bailouts in the energy sector coincided with an 8.26% year-on-year expansion in M3 in October, the fastest since September 2023. (Figure 5, middle diagram)
November data remain unpublished.
More broadly, the BSP has either delayed, discontinued, or reduced the frequency of several previously standard statistical releases—ranging from Bank’s MSME lending to stock market activities (transactions, index, and market capitalization) and more. Whether this reflects capacity constraints or political narrative sensitivity remains an open question. But opacity rarely improves credibility.
VII. Self-Poverty Ratings, Sentiment, and the Limits of Macro Optics
While headline CPI surprised to the upside, food inflation for the bottom 30% of households turned positive for the first time since March 2025—a critical inflection point historically associated with rising hunger and self-rated poverty. (Figure 5, lowest visual)
Figure 6
Consistent with this, the SWS Q4 survey showed self-rated poverty rising to 51% of households, with another 12% on the borderline—a combined 63%. (Figure 6, upper chart)
This deterioration in sentiment persists despite record consumer credit, near-full employment headlines, slowing CPI, pandemic-scale deficit spending, and still-positive GDP growth.
This is not an anomaly. Improvements in self-rated poverty reversed as early as 2017, spanning two administrations and coinciding with a sustained surge in deficit spending.
What is rarely discussed is that this reflects the redistributive and extraction effects of crowding out—the attenuation of the private sector in favor of the state and its preferred private sector intermediaries.
Households have responded predictably by leveraging their balance sheets to sustain consumption amid eroding purchasing power, refinancing debt rather than building resilience through savings.
This divergence between headline indicators and lived experience is a classic case of James Buchanan’s fiscal illusion. By diffusing costs through inflation, deficits, and administered prices, the state masks the true burden of adjustment—until it reappears in household balance sheets and public sentiment.
VIII. Employment Optics vs Labor Reality
The government reported improving employment data last November. Less visible is that labor force participation has been declining since late 2022, while employment momentum shows signs of plateauing (via rounding top formation). (Figure 6, lower graph)
More troubling is the quality of employment. Functional illiteracy remains widespread, MSMEs and informal work dominate job creation, and household income growth remains structurally dependent on OFW remittances.
This combination explains why sentiment remains depressed—and why slowing GDP risks morphing into a more pernicious mix of rising NPLs, renewed inflation pressures from deficit monetization, or outright stagflation.
IX. Deficits, Debt, and the Entropic Drift
Despite the rhetoric surrounding corruption and reform, the administration has signed a Php 6.793 trillion 2026 budget, ensuring that the entropic forces dragging on growth remain firmly in place.
Figure 7
Public debt rose to a record Php 17.65 trillion in November, up 9.7% year-on-year, defying the Bureau of the Treasury’s September projection of year-end declines. (Figure 7, middle and topmost images)
Domestic debt expanded by 10.95%, while foreign debt rose 7%, continuing its gradual upward share since 2021.(Figure 7, lowest diagram)
As we have repeatedly argued, expanding deficits mechanically imply rising debt and servicing burdens. Whether domestic or foreign, this accumulation heightens balance-sheet and duration risks.
No amount of propa-news or fiscal newspeak alters that arithmetic.
Eventually, these imbalances surface—in the exchange rate, inflation, interest rates, asset prices, and real activity. Not abruptly, but gradually, through a boiling-frog dynamic—a process that markets ventilate over time.
As Mancur Olson warned, mature systems accumulate distributional coalitions that extract rents while resisting adjustment. The result is slower growth, rising inequality, and a political preference for redistribution over reform—precisely the conditions now reflected in peso weakness and declining household sentiment.
X. PSE’s January 2026 Boom: Liquidity First, Fundamentals Later
Unsurprisingly, liquidity-driven rallies continue to propel global equity markets, with the effect especially visible in Asia. The Philippine PSEi 30 gained 3.47% week-on-week (WoW), ranking fourth in the region. As evidence of speculative mania, nine of nineteen Asian indices closed at or near all-time highs for the first time, delivering unusually strong market breadth.
Figure 8
Yet the Philippine rally remains highly concentrated, with a handful of brokers and heavily traded issues generating most of the volume. The largest-capitalization stock, ICTSI, surged 12.5% WoW, almost single-handedly driving the PSEi 30, flanked by Jollibee (+12.32%) and AEV (+11.35%). (Figure 8, topmost visual)
Weekly breadth within the PSEi 30 favored gainers (19 of 30), while the broader PSE recorded its best two-week breadth since January 2023—ironically, the PSEi 30 still closed 2023 down 1.77%. (Figure 8, middle window)
Although the number of issues traded daily spiked to 2022 highs—often read as a sign of rising retail participation—main-board turnover averaged just Php 6.25 billion per day, a curious outcome amid New Year euphoria. (Figure 8, lowest chart)
As with prior easing-driven rallies, such liquidity pumps tend to have short half-lives.
XI. Conclusion: Record USDPHP A Symptom, Policies The Disease
The November break of USDPHP 59 marked the unraveling of the BSP’s soft peg and exposed underlying economic fragility. December’s record highs made clear that this was not a transient overshoot, but the manifestation of deeper fault lines—fiscal bailouts, and mounting financial stress—expressed as widening bailouts initially at the energy sector
January 2026 merely confirms the trajectory. What appears as resilience in the BSP’s foreign reserves has largely been valuation-driven. What looks like disinflation is increasingly administrative maneuvers. What passes for growth is the rising use of leverage, mounting deficits, and liquidity injections rather than productivity or competitiveness.
In this sense, the peso’s decline is not an accident of global conditions. It is the byproduct of a political-economic regime that repeatedly socializes losses, crowds out private adjustment, favors centralization, predisposed to asset bubbles and substitutes newspeak for balance-sheet repair.
The exchange rate is not the problem. It is the messenger.
____
References
Friedrich von Hayek, Choice In Currency, A Way To Stop Inflation, The Institute Of Economic Affairs 1976
Prudent Investor Newsletters, The USD-PHP Breaks 59: BSP’s Soft Peg Unravels, Exposing Economic Fragility, Substack, November 02, 2025
Prudent Investor Newsletters, USD-PHP at Record Highs: The Three Philippine Fault Lines—Energy Fragility, Fiscal Bailouts, Bank Stress, Substack, December 21, 2025
Nassim Nicholas Taleb An Expert Called Lindy January 9, 2017
