``Governments remain today, as much as when Hayek spoke these words, under the sway of political ideologies that insist it is the duty of the state to regulate the market in the service of powerful special-interest groups, to redistribute wealth, and to secure “safety nets” under most aspects of everyday life. The budgets and deficits of many EU countries, and the fiscal crisis they have now gotten themselves into demonstrate this beyond any doubt.” Richard M. Ebeling
I’d like to bring about a small point on the Peso and the Phisix.
In contrast anew to domestic mainstream analysis, the Peso has been proceeding in accordance to our projection. The Peso should continue to appreciate (anywhere in the range of 43 to 44+ to a US dollar by the yearend) as the Phisix surges.
The Peso’s rise will reflect on many factors, but mostly on excess US dollar liquidity and divergences of monetary policies.
Not only has the Peso risen despite the recent lagging actions[1] relative to our neighbors, which I had suspected had been part of the political efforts to embellish of the image the new President during his first State of the Nation Address (SONA). As a political group the Peso has now become sensitive to the demands of OFWs. Hence, I suspect the constant involvement by the Bangko Sentral ng Pilipinas (BSP) or the Philippine central bank to stem any meaningful appreciation.
Notice too that the Peso immediately rallied fervently just right after the SONA. This only furthers my impression that our new President has been soooo obsessed with image preservation or maintaining high popularity ratings, therefore would resort to populist measures at the expense of the public. Sorry to say, but a majority of the people are economically unlearned to absorb such truths.
But unless the BSP would take the risk of severely undermining the Peso in order to match the inflationary policies implemented by the US authorities, efforts to keep the Peso from rising will only serve as temporary patches. But again unknown to the public, all interventions has attendant costs, and will be paid for by the public either through a lowered purchasing power (higher consumer prices) or higher taxes in the future.
Nevertheless as the US continues to manipulate her bond markets for the purpose of allegedly staving off deflation, such actions accentuate the increasingly gaping policy divergences between Asia and the US.
And foreign currency reserve rich China, perhaps anticipating such predicament, appears to join us in becoming more bullish with the austerity conscious Euro[2], and likewise parts of Asia, such as Japan and South Korea[3] where she had embarked on selling US dollar ‘bonds’ for Euro and the Asian ‘bond’ assets.
And the greater the policy divergences, the higher the allure to arbitrage against the US dollar for higher yielding assets (a.k.a. carry trade) like the Peso.
And as we have previously argued[4], the influx of foreign money will not only intensify the price actions in the Phisix (see Figure 6), it will also be reflected on other domestic assets as real estate, bonds (already happening) and hopefully into more investments.
Nevertheless all these will be vented on the price of the Philippine Peso.
Figure 6: Peso and Net Foreign Trade in the Phisix
We have previously pointed out (left window-Peso at the upper pane and foreign trade at the lower pane) that surging foreign interest in the Phisix coincided with a higher Peso.
By way of the recent market actions, this phenomenon seems to be taking place again and seems to build up pressures incrementally prior to a massive move (right window).
Of course, the caveat will be expectations of a reduction in liquidity (risk aversion) in the marketplace.
But given the prospects of a slowdown which has given rise to mainstream’s heightened need for more political actions, we can expect policymakers to go about unleashing a new wave of liquidity as had been in the Lehman episode of 2008 or during the Greece spurred Euro crisis of 2010.
At the end of the day, for policymakers it’s all about economic ideology, path dependency and adherence to superstitions cloaked with mathematical formalism.
But of course, all these won’t repeal the natural laws of economics.
[1] See The Philippine Peso’s Lagging Performance July 18, 2010
[2] Bloomberg.com China Favors Euro to Dollar as Bernanke Shifts Course, August 16, 2010
[3] Bloomberg.com China Doubles Korea Bond Holdings as U.S. Debt Sold, August 18, 2010
[4] See Buy The Peso And The Phisix On Prospects Of A Euro Rally, June 14, 2010
