Peso Breakdown Myths: Neither the US Federal Reserve Nor the Stock Market Has Been Responsible

The breakdown of the peso has landed on the headlines of a major broadsheet. The USD php soared by .5% to Php 48.25 yesterday, and yes, to a seven -year high. (History is in the making!)

Except for the price levels and historical comparison, the Inquirer article has been laden with inaccuracies and myths. The article was limned to shift the blame on the peso’s woes to external events.

I have shown you yesterday how the peso was last week’s sore thumb. It was the sole loser in the region.

A better picture would be the year to date performance.

As one would note, even prior to yesterday’s breakdown, the USD advanced mainly against the yuan and the peso; with the USD rupee also moderately higher. The region’s currencies have mostly strengthened against the USD.

The point here is that there has been LITTLE, or even NO truth, that US rates have had a significant influence on the USD php.

Though the USD peso has been in an uptrend over the long term, it began its interim surge in mid-August.  

Again the emphasis here is to establish the fact that while foreign money has sold Philippine stocks over the past few weeks, net foreign selling was just part of the story.

That’s the BSP’s data on net foreign portfolio. As of end August, foreign portfolio was net positive to the tune of $427 million. In fact, net foreign flows accounted for US$2.08 billion year to date.

In short, the peso has already been weakening even when portfolio flows had been net positive in terms of BSP data.

On the other hand, in the context of the PSE, net foreign selling has occurred in six consecutive weeks through the end of September 23. Net foreign sales ballooned to about Php 7.5 billion in two consecutive weeks (September 2 and 6). But from here, net foreign selling has substantially eased.

In fact, yesterday’s 1.18% loss in the PSEi posted only Php 16.9 million of net foreign selling. This means locals were responsible for the decline. Hence the diminished marking the close!

And the thing here has been that while net foreign selling has ebbed, the peso crumbled at a much fasterrate!

Curiously, the PSE even rushed to explain the role of foreigners yesterday.

"We have been experiencing net foreign selling in the market in the past weeks but numbers show that this has slowed down following the recent meeting of the US Federal Reserve. Perhaps it is also an indication of fund managers locking in gains, as the PSEi has delivered double digit returns since the start of the year. Our economic fundamentals remain strong and this should continue to help corporate performance moving forward," said PSE President and CEO Hans B. Sicat.

Mr. Sicat explained, "Investors tend to put more value on macroeconomic developments and corporate fundamentals in assessing their investment positions and portfolios over the medium- and longer term. Developments on the local political front may be getting a lot of attention recently but we believe the story of the Philippine economy will remain to be the compelling driver for attracting investments

The PSE and the newspaper article seem to suggest that it has been inappropriate (or politically incorrect) for money managers to sell the most expensive stock market in Asia! For them, valuations don’t matter at all! The Philippines have attained nirvana thereby has been immaculate to imbalances and imperfections.

The bottom line: For now, the pesos’ predicament has neither been mainly about the foreign selling in the stock market nor about anticipated actions of the US federal reserve.

While macro conditions will play a role (particularly liquidity), the USD peso exchange rate will ultimately hinge on changes in the balance sheet, income and cash flows of the Philippine political economy. And a spendthrift leftist government heralds to a weak currency [Phisix 7,150: Prospects of a Strong Man Rule Sends Peso Tumbling, Why A Shift to the Political Left Will Mean A Weaker Peso May 1 2016]

Oh, do expect the BSP to intervene substantially. But when they sell USD to prop the peso, this entails of a tightening of the domestic liquidity. And this would adversely affect credit flows. So damned if you do, damned if you don’t.

Perhaps media will shift the blame to currency speculator George Soros (who was accused by the Malaysian government of being responsible for the Asian crisis)

In a Week where the US Dollar Weakened, the Peso Signified as the Region’s Sore Thumb

I mentioned earlier that the official USD-Philippine peso exchange rates closed at the January 26 high of 47.99.

For the week, the Philippine peso acted like a sore thumb in a week where Asian currencies firmed substantially. Or the peso was the only loser.

The USD php rose .4% for the week.

Two major factors that have contributed to the risk ON environment that saw Asian currencies strengthened—both anchored anew on central banks.

First, the Bank of Japan’s new template of focusing on yield curve control was apparently seen as greatly beneficial for banks and was thus “easing” in a sense.

The new ‘financial engineering’ involves moving away from targeting monetary base by scraping the guideline for purchases of the remaining average maturity of JGBs, hence intended to control the slope of the yield curve via a steepening. A steepening would thus lead to incentives for banks to lend. (CNBC, Asia Nikkei). The BOJ maintained the negative rates as well as the quantitative targets for its large-scale asset purchases

Of course, this will always be a question of how the new experiment works. The fact the BOJ continues to double down on even more insane policies shows that it has become so desperate as to keep digging deeper into the policy rut in search of futile hope.

Nonetheless, short-term effects have become the principal objective for central banks. Or central banks have been hostaged by the financial markets. Prospects of instability have only meant more policy accommodation. 

On the other hand, in another deferment rate hike, a “divided Federal Reserve left its policy interest rate unchanged to await more evidence of progress toward its goals, while projecting that an increase is still likely by year-end”, according to Bloomberg. This represents the “sixth straight hold extends U.S. central bankers’ run of getting cold feet amid risks from abroad and inconsistent signs of economic strength”

Additionally, the increasingly divided FED was supposedly influenced by speeches and dismal data that spurred another interest rate stay

As I have been saying here, actions by the FED reveals how they have been trapped. (September 13, 2015)

Given what I see as the du jour central banking boilerplate of “I recognize the problem of addiction but a withdrawal syndrome would even be more cataclysmic.” I lean towards the FED’s moving of goalpost or a ‘one and done’ affair.

Like the BSP, the FED is trapped from their own policies.

Once inflationism has been started, the path dependency, or bluntly, addiction to it becomes so deeply embedded for governments to wean from it.

As the insightful analyst Doug Noland deftly explained, “History has demonstrated that, once commenced, monetary inflations are exceedingly difficult to control – let to alone rein in.”

Hence by virtue of sustained easing, such has spurred a risk ON environment. And part of the risk ON environment was to see Asian currencies strengthen.

The pesos’ weakness can be seen as practically a “domestic” induced factor.

Some possible perspectives

One. This may be KNEE JERK reaction. The recent sharp losses may be signifying a transition window or birth pangs given the radical approach by the new administration.

So while this may be true, where eventually the currency market will learn its way in dealing with the new administration, it will always be the structural changes in the political economy that matters.

While the Phisix should showcase the changes in balance sheet conditions of the listed major companies comprising the index basket, the peso, on the other hand, represents the balance sheet of the issuer of the currency, the Philippine government, through its legal tender laws, supported by the domestic economy.

Two. Geopolitical developments have made the peso as a political weapon. I have noted that the S&P has hinted on downgrades of the Philippine government's credit rating. Part of this political process may be for US government to influence the administration through the financial markets, partly USD-peso exchange rate.

Representatives of US interests here may be buying the dollar or shorting the peso.

Three. There could be a real run on the peso. Question is; who have been the entities stampeding out of the peso. Have they been domestic elites? Have they been foreign investors? Or a combination?

Media has been quick to paint “bullishness on the government” in an apparent attempt to stem the peso’s bleeding.

Have these been anchored on anticipation on the deterioration of the balance sheet of the government?

Four. A combo of the above.

Momentum has palpably shifted towards a possible breach of the January 26 USD php highs. Post Fridaytrading hours reveals of a significant breach in USD php at 48.

If this will be sustained through today’s session and or through this week, then USD php 50 should be the next target.

I have said that the USD strength has been a long term trend.

The USD peso ten year chart above reveals of the rangebound peso, with pressures mounting to break past 50 and succeeding targets. The peso hit a high of 56.45 twice in September 27, 2004 and in October 13, 2004.

Meanwhile since 1960, despite the recent rally, the average USD peso annual trend remains on the upside. 

Understand that bubbles alone (relative money supply growth) will translate to a weak peso. What more of a widely expansionary government—with the goal of instituting a police state that will accelerate the exposure of the embedded imbalances and worsen balance sheet conditions underpinning the peso.

Finally, similar to the past, expect media to take a spin on the weak peso—this will be good for exports, for BPOs and OFW remittances. Oh be reminded, remittances are not the same as BPOs. Dollar proceeds from BPOs are revenues (services export). Remittances signify as final demand.

History at the crossroads is in the making!