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

Fear the ‟Trump Trade‟ or a Pushback on Fed Policies? Trump or Harris: The Era of the Bond Vigilantes is Upon us

An election is a moral horror, as bad as a battle except for blood; a mud bath for every soul concerned in it—George Bernard Shaw

In this issue

Fear the ‟Trump Trade‟ or a Pushback on Fed Policies? Trump or Harris: The Era of the Bond Vigilantes is Upon us

I. US Election Narrative: Fear the Trump Trade!

II. Market Chaos Erupts after Fed’s September Rate Cut

III. Global Economic War and the Inflation Scorecard: Trump versus Biden-Harris; Trump’s Tariffs as Negotiation Card

IV. Emerging Market and ASEAN Stocks, the PSEi 30 Hit a Record High in Trump’s Term, Philippine Peso Flourished Under Trump!

V. The Biden-Harris Legacy of "Proxy Wars"

VI. Trends in Motion Tend to Stay in Motion: World War III’s Multifaceted Aspects

VII. Global Kinetic Warfare and the Cold War as Products of the Fed’s and Global Central Bank’s Easy Money Regime

VIII. Conclusion: Trump or Harris: The Era of the Bond Vigilantes is Upon Us 

Fear the Trump Trade or a Pushback on Fed Policies? Trump or Harris: The Era of the Bond Vigilantes is Upon us 

Is the "Trump Trade" responsible for recent market convulsions, or does this represent a pushback against the Fed’s actions? Why political-economic trends in motion tend to stay in motion. 

I. US Election Narrative: Fear the Trump Trade!

Trump's Rising Election Odds Sends Emerging Markets Into Tailspin, Causes Biggest Stock Drop In 10 Months (Yahoo, October 27) 

The Bangko Sentral ng Pilipinas (BSP) might have to do more to support the Philippine economy if former US President Donald Trump returns to power and starts a global trade war, which can hurt the entire world and, in turn, dim local growth prospects. (Inquirer.net, October 28, 2024) 

THE RETURN of Donald J. Trump to the US presidency could cause Asian currencies such as the Philippine peso to weaken, analysts said. (Businessworld, October 29, 2024) 

At first glance, it may seem that the following headlines or excerpts were conveyed for Halloween. 

Then, I realized that the U.S. elections are coming up this week. 

Mainstream media has painted an impression that the recent setbacks in the marketplace mean that a Trump win/presidency, or the "Trump Trade," could be detrimental to the markets. 

Let us examine what led to this perspective. 

In October, the Bloomberg spot U.S. dollar index surged by nearly 3% compared to the previous month. The S&P 500 slipped by 0.99%, the iShares MSCI Emerging Market ETF (EEM) dived by 3.07%, and the Global X FTSE ASEAN ETF (ASEA) tanked by 3.9%. The U.S. 10-year Treasury yield surged by 48 basis points (12.7%). 

Meanwhile, at home, the Philippine peso plunged by 3.6%, and the PSEi 30 plummeted by 1.78%. 

The prevailing sentiment in the speculative marketplace has shifted from excessive optimism to risk aversion.

Who else to blame but the leading contender in the prediction markets, Trump!

II. Market Chaos Erupts after Fed’s September Rate Cut 

But does this widely accepted perception accurately reflect causation, or is it intended to shift the Overton Window in favor of the opposing contender, Kamala Harris?

Figure 1 

The rising 10-year yield actually started just after the US Federal Reserve initiated its 50-basis-point rate cut on September 18th. (Figure 1, topmost chart)

It is rare to witness such a combination of powerful forces ripple through other market indicators.

Figure 2

Rising Treasury yields have been accompanied by an appreciating U.S. dollar index, which has also contributed to increased volatility in the bond market (MOVE Index) and volatility premiums across asset markets—including equities, oil, and foreign exchange—as well as a spike in U.S. Credit Default Swaps (CDS). (Figure 1, middle and lower graphs, Figure 2 topmost and lower images)

Figure 3

This dynamic coincided with a spike in the Economic Surprise Index and gold's widening outperformance against the TLT iShares 20-Year U.S. Treasury bond prices. (Figure 3, middle topmost and middle visuals) 

Incredible. 

The most striking indicator of the impact of the Fed's rate-cutting cycle that began in September is that it occurred under the loosest financial conditions since at least December 2022. (Figure 3, lowest diagram) 

In other words, global financial markets have significantly pushed back against the Fed’s easing policy by effectively re-tightening conditions! 

Of course, one could interpret this as "buy the rumor, sell the news." 

Still, other factors are at play—such as unrestrained public spending, surging debt levels, escalating debt servicing costs, geopolitics and more!

Nevertheless, resonating with the "Overton Window" during the pandemic in support of lockdowns and vaccines, the Gramsci-cult elite-controlled media shifted the rhetoric to blame Trump’s predilection for tariffs.

III. Global Economic War and the Inflation Scorecard: Trump versus Biden-Harris; Trump’s Tariffs as Negotiation Card 

First and foremost, yes, while it is true that global trade restrictions did rise in during Trump 1.0 (2017-2021) regime, his successors, the Biden-Harris tandem, pushed for MORE trade barriers, which hit a record high in at least 2022! 

Figure 4

As the IMF chart reveals, the global economic conflict spans both parties, with both candidates appearing inclined toward de-globalization. 

(Note this shouldn’t be seen in a simplistic lens but related to geopolitical developments) 

Second, financial easing amidst the loosest monetary conditions translates to a potential comeback of inflation, which aligns with the perspective that Trump’s trade war results in higher inflation. 

However, that shouldn’t hold water; inflation under Trump’s administration was milder than the inflation epidemic during the Biden-Harris administration. 

Consequently, with higher inflation came higher interest rates as well. 

Third, Trump’s push for tariffs represents a carryover from his 2016 campaign trail. 

He used tariffs as leverage for negotiation but eased up on strict currency regulations, as noted in this Yahoo article. 

Trump has likened his tariff plan to a new "ring around the collar" of the US, with tariffs often described not as part of negotiations but with those high duties as an end goal in themselves to protect US industry… 

He promised during that campaign to impose tariffs, renegotiate NAFTA, and withdraw from the Trans-Pacific Partnership. "Promise kept," PolitiFact said of all three. 

Trump also took action on a fourth promise to declare China a currency manipulator but ended up compromising, according to the group. 

IV. Emerging Market and ASEAN Stocks, the PSEi 30 Hit a Record High in Trump’s Term, Philippine Peso Flourished Under Trump!

Figure 5

Fourth, stock markets haven’t been exactly hostile to Trump.

The ASEAN ETF (ASEA) reached an all-time high in 2018 or during the early phase of his administration, and the Emerging Markets ETF (EEM) also hit a milestone that year and also surged to a fresh record toward the close of Trump’s term. Both markets, however, eventually succumbed to the pandemic recession.

Similarly, the Philippine PSEi 30 hit a significant peak in January 2018, also coinciding with Trump’s administration.

On the currency front, the Philippine peso rallied from October 2018 to the end of 2021.

In fact, contrary to contemporary analysis, the USDPHP fell by 3.7% from January 20, 2017, to January 20, 2021 (Trump’s tenure).

In contrast, under the Biden-Harris administration, the USDPHP has increased by an astounding 21% from January 20, 2021, to the present (October 31, 2024)!

While past performance does not guarantee future outcomes, the scorecard between the contending parties shows a stark difference in the accuracy of the current predominating narratives. 

In a word, propaganda. 

Nota Bene: Past performance is not a guarantee of future results. Our purpose is to highlight inaccuracies in media claims. We don’t endorse any candidates. 

V. The Biden-Harris Legacy of "Proxy Wars"

Fifth, the world is on the brink of, or already embroiled in, a form of World War III, fought across multiple spheres. 

The U.S. suffered a humiliating defeat in the 20-year Afghanistan War, ultimately withdrawing in the face of a relentless war of attrition led by the Taliban’s guerilla tactics. Both the Trump and Biden administrations negotiated withdrawal terms, but the Biden-Harris administration oversaw a controversial chaotic exit in August 2021. 

That aside, a series of conflicts has marked the Biden-Harris administration’s legacy. 

The kinetic conflict began with the Russia-Ukraine war in 2022, spread to the Israel-Palestine/Hamas war in 2023, and has since escalated to include confrontations involving Israel-Hezbollah or the "Third Lebanon War," and even the precursory phase of Israel-Iran Conflict in 2024. 

Simultaneously, following Obama’s failed "Pivot to Asia," geopolitical tensions have been mounting in the Taiwan Straits, the South China Sea, Central Asia, and other parts of the world. 

Notably, these ongoing and emerging conflicts are interconnected.

For example, the U.S. has been supplying not only aid but also arms to its allies to counter hegemonic rivals.

Figure 6

Aside from supplying 70% of conventional weapons, U.S. military aid/grants to Israel soared to all-time highs in 2024! (Figure 6, topmost chart)

That is to say, the current conflicts represent "proxy wars" where the U.S. led NATO forces engage indirectly to pursue hegemonic objectives.

VI. Trends in Motion Tend to Stay in Motion: World War III’s Multifaceted Aspects

The Global Warfare has also entered the economic and financial spheres—seen in the weaponization of the U.S. dollar through asset confiscations targeting so-called "axis of evil" nations, and in the reinforcement of a modern-day "Iron Curtain" marked by significant restrictions on trade, investments, capital flows, and social mobility.

Mounting trade imbalances, which helped fuel the rise in trade barriers from the Trump administration to Biden-Harris, have also laid the groundwork for today’s outbreak of kinetic conflicts.

Geopolitical tensions have surfaced as a growing cold war in other regions as well.

This hegemonic competition to expand sphere of influences has percolated to Africa, Latin America, the South Pacific, and the Global South (BRICs), some of which channeled through mercenary or gang wars and local civil wars. (Dr. Malmgren, 2024)

Ironically, four of the five ASEAN majors, specifically, Indonesia, Thailand, Malaysia and Vietnam recently signed up for the BRICs membership.

The implicit cold war has also extended into previously uncharted areas: underwater territories, space, the Arctic, the Pacific, mineral resources (like rare earth elements), and technological domains such as DNA research, cyberspace, and microchips (Malmgren, 2023).

The point is that these evolving conflicts underscore the interconnectedness of U.S. foreign and domestic policy.

Given the powerful forces behind this trajectory or the "deep state"—including the Military-Industrial Complex, the National Security State, Straussian neoconservatives promoting the "Wolfowitz Doctrine," the energy industrial complex, Big Tech, and Wall Street—it is unlikely these developments will cease, whether under a Trump 2.0 administration or (Biden carryover through) a Harris regime.

Put simply, while media narratives may further lobotomize or impair the public’s critical thinking, potentially deepening societal division, a meaningful change in the U.S. and global sociopolitical and economic landscape remains unlikely if elections continue to focus on what I call as "personality-based politics."

As investor-philosopher Doug Casey rightly observed, "Trends in motion tend to stay in motion until they reach a crisis."

VII. Global Kinetic Warfare and the Cold War as Products of the Fed’s and Global Central Bank’s Easy Money Regime

Lastly, the public tends to overlook that current trends are merely symptoms of deeper issues or mounting disorders stemming from the decadent U.S. dollar standard.

As investor Doug Noland astutely wrote 

Bubbles are mechanisms of wealth redistribution and destruction – with detrimental consequences for social and geopolitical stability. Boom periods engender perceptions of an expanding global pie. Cooperation, integration, and alliances are viewed as mutually beneficial. But late in the cycle, perceptions shift. Many see the pie stagnant or shrinking. A zero-sum game mentality dominates. Insecurity, animosity, disintegration, fraught alliances, and conflict take hold. It bears repeating: Things turn crazy at the end of cycles. (bold mine) [Noland, 2024] 

Easy money has long fueled, or been instrumental in financing, the global war machine, leading to today's bellicose conditions.

Easy money has also powered the growth of big government and contributed to economic bubbles and their eventual backlash, as evidenced by China’s unparalleled panicked bailout policies to prevent a confidence crisis from imploding. 

The push for easy money is likely to persist, whether under a Trump 2.0 or a Harris administration. 

As Professor William Anderson noted, 

The unhappy truth is that both platforms will need the Federal Reserve System to expand its easy money policies, despite the massive damage the Fed has already done by bringing back inflation. While Harris claims to defer to the “experts” at the Fed, Trump wants the president to have more power to set interest rates. Obviously, neither candidate is acknowledging the economically perilous situation in which the government ramps up spending, which distorts the markets, and then depends upon the Fed to monetize the resulting federal deficits. As the debt grows and the economy becomes progressively less responsive to financial stimulus, the threat of stagflation grows. The present path of government borrowing and spending all but guarantees this outcome, and the candidates have neither the political will nor the economic understanding to do what needs to be done. (Anderson, 2024) 

U.S. debt is fast approaching $36 trillion, while global debt reached $315 trillion in Q2 2024 and counting. (Figure 6, middle and lower charts) 

"Trends in motion tend to stay in motion until they reach a crisis."

VIII. Conclusion: Trump or Harris: The Era of the Bond Vigilantes is Upon Us 

While the "Trump trade" provides a convenient pretext for the current tremors in the global financial market, this narrative relies on inaccurate premises and misleading speculative claims that are unsupported by empirical evidence. Instead, these assertions aim to sway the voting audience ahead of this week’s elections. 

In contrast, the current financial market convulsions reflect a significant pushback against the Fed’s and global central banks’ prolonged easy-money policies. As investor Louis Gave of Gavekal recently noted, "Zero rates were a historical aberration that need not be repeated." 

Needless to say, regardless of who wins the U.S. presidency, political agendas will continue to advocate for easy money and various forms of social entropy and conflict. 

Unfortunately, there is no such thing as free lunch forever. 

Although trends in motion tend to stay in motion, the era of the bond vigilantes is upon us.  

Things have been turning a whole lot crazy. 

___

References 

Yahoo Finance, What Trump promised in 2016 on tariffs. And what he delivered (a lot). October 28, 2024, 

Dr. Pippa Malmgren The Cold War in Hot Places, March 12, 2024 

Dr. Pippa Malmgren WWIII: Winning the Peace, October 28, 2023 drpippa.substack.com 

Doug Noland, Vigilantes Mobilizing, Credit Bubble Bulletin, November 1,2024 

William L. Anderson  The Great Retreat: How Trump and Harris Are Looking Backward, August 30, 2024 Mises.org 

Louis-Vincent Gave, Behind The Bond Sell-Off, Evergreen Gavekal October 31, 2024

USD-Php Spike: A Trend Reversal in Favor of the USD-Php? The Strong Peso: The Emperor Has No Clothes

 

No country has strengthened the demand for its local currency by confiscating savings and salaries through massive increases in the money supply and confiscatory fiscal measures. It is a double expropriation of wealth—Daniel Lacalle 

 

In this issue: 

 

USD-Php Spike: A Trend Reversal in Favor of the USD-Php? The Strong Peso: The Emperor Has No Clothes 

I. The Loose Correlation Between Surging USD and the USD-Peso Spike 

II. A Bear Market Climax: A Trend Reversal in Favor of the USD-Php? 

III. The USD Standard: Eroding the Stability Role of the Peso: BSP’s Falling Share of International Reserves  

IV. Record GIRs Built on “Borrowed Reserves” or USD Shorts! 

V. Will Broken FX-Economic/Monetary Correlations Be Restored? 

VI. Conclusion: Strong Peso: The Emperor Has No Clothes 

 

 

USD-Php Spike: A Trend Reversal in Favor of the USD-Php? The Strong Peso: The Emperor Has No Clothes 

 

I. The Loose Correlation Between Surging USD and the USD-Peso Spike 

 

The USD-Php surged by 1.48% this week to close at Php 49.2, a level last seen in July 2020 or about a year ago. Year-to-date returns suddenly turned positive from the 3.14% aggregate gains from three consecutive weeks since its lows in mid-June. 

  

The US Dollar index (USD) rose by .4% and had been a factor in the collective weakness of the region’s currencies. Aside from the peso, the Thai baht fell 1.52%, the biggest decliner in Asia, while the Indonesian rupiah and the Indian rupee dropped .75%, respectively. 

 

But the strength of the USD can hardly be explained by the sharp decline of the Philippine peso or the spike of the USD-Php in the context of charts and fundamentals. 

 

Figure 1 

Chart Technicals. 

 

The uptrend in the USD emerged in the 1Q of 2018 and peaked in the 2Q of 2020. The US Federal Government’s policy response to the pandemic ended it and pushed the USD index into a three-quarter downtrend. The USD index carved a low in the 1Q 2021 or experienced a short bounce from January to April 2021 but dropped anew until May that seemingly forged a double bottom. From here, it spurred the recent rebound. (Figure 1 upper window)

 

At present, a second USD rally appears in the works. But it seemed to have reached overbought levels.  

 

Let us move on to the peso or the USD-Php. 

 

The peso bottomed and rallied in 2019, as the USD climbed, and strengthened further when the USD declined in the last three quarters of 2020. The firming peso was insouciant to the USD rally in the 1Q 2021. 

 

That is to say, when the peso advanced (USD-Php declined) from late 2018 to the end of the 2Q 2021, the direction of the USD was largely inconsequential. Or, the USD dynamic had a minor influence on the trend of the USD Php. 

 

In this context, a loose correlation exists between the USD and the peso. Thus, the USD's current relationship with the peso, or its supposed influence, is more of a coincidence or noise unless time proves this otherwise.  

  

II. A Bear Market Climax: A Trend Reversal in Favor of the USD-Php? 

 

 

Figure 2 

 

The more important picture is the seeming validation of the USD-Php 2-year downtrend breakout. Not just barreling through with conviction that sent the USD-Php way above its previous resistance level, heavy volume accompanied its dramatic breakthrough. (Figure 1 lower window) 

   

But the USD Php needs another technical confirmation. Should the previous resistance level at Php 48.7 to Php 48.9, which now functions as support, hold in the next downdraft and reflexively bounce from it, then the USD-Php is on the way up! (Figure 2 upmost pane) 

  

Two factors identifying the target range ceiling for the USD Php: ONE, the resistance level marked by the peak of 2004-2005, and the high of 2018. TWO, the resistance of the upper channel of the USD peso from 2008. That is to say, the uptrend of the USD-Php could reach the interim or moving range of Php 54 to Php 55.50. (Figure 2 upmost window) 

  

Even from the very long-term perspective, based on the BSP’s annual end-of-period data, the USD-Php uptrend remains intact. 2020 closed at the 39-year support.  (Figure 2 middle window) 

 

III. The USD Standard: Eroding the Stability Role of the Peso: BSP’s Falling Share of International Reserves  

 

Most importantly, economic-financial-monetary fundamentals don’t support a sustained bid on the peso. The recent downtrend of the USD had mainly been a product of the BSP’s FX operations.  

 

A legion of rationalizations from experts explained the recent vitality of the peso. For instance, economic weakness from the pandemic, current account balance, OFW remittances, record Gross International Reserves are among the most popular. 

 

What’s striking has been the OFW remittance data. Despite the massive dislocation of OFWs and migrant workers, remittances were barely affected by the pandemic in 2020. The contrasting data from the BSP/OWWA/POEA suggests that the causal relations of the overseas workforce and remittances have been weak.  The message to the public appears to be: To accept what authorities say regardless of the flagrant inconsistencies of data and innumeracy of logic. 

 

OFW Unemployment versus Remittances Data: Which of the Two is Accurate or Valid? November 24 

 

Ironically, the peso keeled even as the Philippine Government borrowed $400 million from the World Bank and $ 3 billion from the global bond markets this week. The previous external borrowing binges helped lifted the peso.  But, it did not appear to work this time around. Such detachment could be a signal of a fresh dynamic on the USD-Php.  

 

On the face of it, Gross International Reserves' headline role would seem like a critical factor. 

 

According to the BSP, the primary function of international reserves is to provide liquidity support in times of volatility in the exchange rate and balance of payments. 

 

But the asset segment of the BSP’s balance sheet remains dominated by international reserves.  

 

Before 2020, FX reserves accounted for a share of 85% to 88% of its total assets. The fluctuation of FX reserves, hence, had been within a very tight range. Stated differently, the BSP ensured that the composition of its assets revolved around a fixed share of the USD reserves held.  

  

The dominance of FX reserves showcases a de facto USD standard, which the Philippine monetary system operates on. 

 

In this case, the supply of USD reserves functioned as an "anchor" or a "peg" that limits the domestic liquidity expansion of the financial system managed by the BSP. 

 

But 2020 drastically altered the mix of the BSP's balance sheet!  

 

Though the FX reserves of the BSP expanded at a historic pace, reflecting the massive debt being acquired by the National Government, its share of total assets plummeted.  

 

As of the 1Q 2021, the % share FX reserves dived to 66.63%, the lowest in a decade at least, as BSP’s QE snared the reduced FX pie of the BSP’s assets. The % share of domestic securities and loans of advances substituted the FX’s diminished role. (Figure 2: lowest panes) 

 

It stands to reason that the overexpansion of domestic liquidity relative to the USD-FX reserves alone points to the prospective downfall of the USD-Php, as the supply of peso immensely exceeds that of the USD threshold base. 

 

IV. Record GIRs Built on “Borrowed Reserves” or USD Shorts! 

 

And there’s more. 

 

The vigor of the peso was supposed to have been bolstered by a record GIR, according to the consensus.  But the propagation or the mechanics of the GIR has barely been analyzed by them. 

 

But as earlier pointed out elsewhere, the BSP relied on FX operations, mainly from Other Reserve Assets (ORA)*, constituting financial derivatives, short-term FX loans, repo assets, non-negotiable investment funds, and long-term loans to the IMF's Managed Trust Accounts, to keep the peso strong. Data from IMF’s International Reserves and Foreign Currency Liquidity (IRFCL). 

 

*IMF, INTERNATIONAL RESERVES AND FOREIGN CURRENCY LIQUIDITY GUIDELINES FOR A DATA TEMPLATE p.25 IMF.org  

 

A strong peso provides tacit support to entities with significant FX debt exposure. Think San Miguel. 

 

ORA became a critical tool for the BSP’s FX reserves management ever since the climax of the peso’s cascade or the rise of USD-Php, which culminated in 2018.  (Figure 3, middle pane)  

 

Figure 3 

 

The peak of the USD-Php in 4Q of 2018 coincided with the BSP's buildup of ORA in its GIRs. Since this operation became part of the conventional FX management of the BSP, the use of ORAs sent GIRs to record levels. (Figure 3, upmost pane) 

 

From next to zero before 2018, ORA reserves reached a high of 14.7% in January 2021, second only to the all-time high of 16% in December 2019. 

 

That is to say, the recent gains of the BSP's GIRs are 'borrowed reserves' that require repayment also in FX currencies. Or, these represent 'short USD' or FX exposures.  

 

Loose conditions from global central banks have tolerated such unsustainable dynamics. US and European junk bonds recently hit a record low. Negative bond yields deepen in Europe. Greek bond yields turned negative a few weeks back.  These are evidence of the intensifying frenzy of the crowd phenomenon of blindly chasing for yields, characterized by the memes of the Fear of Missing Out (FOMO) and There Is No Alternative (TINA)!   

 

Mistaking "low" yields as signs of confidence or a manifestation of economic or financial (current and future) strength misreads the smoke and mirror brought by the distorting activities of central bank policies.   

 

Circling back to the ORA.  

 

But because there are costs associated with maintaining such levered operations, the BSP reduced ORA holdings in March 2021. Instead, the BSP turned to the loans acquired by the National Government as substitutes for its 'reserves'.  

 

From the Inquirer (July 2): Foreign borrowings and grants obtained by the Philippines to fight the COVID-19 pandemic reached $18.4 billion (about P903 billion) in June, with the bulk of which injected into the budget, the Department of Finance (DOF) said. In a report, the DOF said $16.26 billion of these externally sourced funds had been set aside for budgetary support. As of June 25, $15.6 billion of these external loans plus proceeds of offshore bond issuances were already disbursed to the government, the DOF said.  

 

Figure 4 

While the most politically convenient excuse is to use the pandemic for the spate of borrowings, the real reason for the external debt binge is to support the BSP’s balance sheets and the monetary system. 

 

Such is the reason why in the last 5-months, public financing (Php 1.56 trillion) has almost tripled the amount of fiscal deficit (Php 566.2 billion). (Figure 4, upmost pane) 

 

Public spending for the pandemic represents a subordinate concern. 

 

Hence, in contrast to 2018, the recent ORA withdrawal sent the USD Php on a present downside spiral with a time lag. 

 

Curiously, the BSP continues to lighten up on its physical holdings of gold! (Figure 3 lowest pane) 

 

Based on the GIR, the domestic financial system is supposed to be awash in FX. 

 

Interestingly, net foreign asset (NFA) growth continues to sizzle. NFAs of financial institutions/Other Depository Corporations (ODC) topped in July 2020 at a blazing 108.6% but have moderated to a still red-hot 34.6% in May. Meanwhile, the growth of the BSP’s NFA reached an acme of 20.6% in December 2020 but has eased to 11.8%. (Figure 4, middle pane) 

 

But has it not been paradoxical that the FX deposit growth of the banking system has stalled even as the BSP declared recently record GIRs?  What happened to all the FXs from external-NFA borrowings? Where did it flow?   (Figure 4, lowest pane) 

 

What has vacuumed the FX liquidity from the system? 

 

V. Will Broken FX-Economic/Monetary Correlations Be Restored? 

 

The 2-year strength of the peso has violated some important correlations.   

 

Figure 5 

 

For instance, the peso has ignored the inflationary effects of BSP’s monetization of the National Government through the secondary markets, aside from the public debt support by financial institutions which hit a record in May 2021. The USD Php rose when the BSP embarked on stealth QE in 2015. (Figure 5, upmost window) 

 

Connected with it, the USD Php discounted the monetary blitz from the BSP that revved up the money supply growth as shown by the benchmark M3 from mid-2019 to mid-2020. (Figure 5, middle pane) 

 

However, M3 growth plunged to a shocking 4.7% growth last May, an eight-year and nine-month low on the back of the historic growth dive of cash in circulation, which posted 3.9%, a ten-year low! So how is the economy being financed? 

 

Falling M3 also suggests that the motion towards a diminishment of money supply-induced imbalances should work in favor of the peso over time. But then, can the BSP tolerate its forthcoming consequences? 

 

Finally, the USD Php failed to keep up with the surge in statistical inflation and with it, yields of Philippine treasuries. 

 

Will a restoration of broken correlations occur? 

 

From the BSP’s Exchange Rate Primer (p.4): If the exchange rate movement threatens to move inflation rate outside its target range, the BSP also uses monetary measures, including adjusting the key policy rates or the interest rates it charges for its borrowing and lending activities. For example, in periods of weakening pressure on the peso, increases in interest rates tend to dampen the demand for dollars. As a result, the depreciation pressure on the peso eases. 

 

So will a resurgent USD Php push rates higher to offset the BSP’s monetary policies? 

 

VI. Conclusion: Strong Peso: The Emperor Has No Clothes 

 

The crux of the matter, unless the economy generates sufficient organic FX flows (exports, FDIs, BPO revenues, OFW remittances, and tourism receipts) to settle its mounting outstanding liabilities, the toll from the artificial inflation of the peso will see a day of reckoning.   

  

While the interventions of the BSP can only buy time, it only adds to its burdens. But since political authorities are concerned more about the immediate effects of unwanted market actions, it won’t stop them from doing so. So bi-directional volatility may be expected.

  

Meanwhile, any weakness of the USD relative to its OECD peers may also help in stonewalling the structural infirmities of the peso. But again, the peso’s structural deficiencies will eventually surface. 

 

 The fundamental laws of economics will prevail. 

 

“These observers do not understand that the valuation of a monetary unit depends not on the wealth of a country, but rather on the relationship between the quantity of, and demand for, money. Thus, even the richest country can have a bad currency and the poorest country a good one.” 

 

Ludwig von Mises, 1. Stabilization of the Monetary Unit — From the Viewpoint of Theory (1923)The Causes of the Economic Crisis, and Other Essays Before and After the Great Depression, Mises.org