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!

Even at 7,720, Average PERs Soar Past 1997 Highs!

Below accounts for the PER of the 30 issue basket of the PSEi.

 

Based on 2015 eps, Friday’s (September 23) PERs have flown past January 1997 high at 28.21!!!

But of course, by virtue of playing around with reference points, the PSE’s PER have actually been pegged at the lower 20s (last July). Although even with cosmetic changes the PSEi remains at severely expensive levels.

And the PSE will likely pin those rates until 2Q EPS appears.

The consensus has been saying on record that present prices are pricing in ‘expected earnings’. But as 2015 episode has shown, the PSEi rocketed to 8,127.48 on expectations of a mid-double digit return for the average PSEi issues. This turned out to be not only wishful thinking but totally outlandish. Instead of G-R-O-W-T-H, 2015 eps recorded stagnation. And that’s the reason for PERs 28.21!

Although the PSEi dropped to 6,100 in January, they remained ridiculously overpriced then. How much more today?

And as I earlier noted, even 1Q 2016 reported an eps growth (-5.5%) contraction. It’s only 2Q 2016, which outperformed (+12.3%) but mainly from contributions of a few issues (whose eps growth suddenly boomed).

Yet the number of issues, which reported growth contractions (9 issues) swelled even larger than 1Q 2016 (7 issues)—yes in the face of a 12.3% eps growth! The asymmetric growth levels tell us of the nature of eps growth—they were mostly accounting profits.

In short, the reason for the sustained mispricing has been for the mainstream to overstate growth expectations that have the only paved way for massive pumping or price multiple expansions.

Since 2013, activities at the PSE have hardly been about G-R-O-W-T-H but about massive asset inflation (bubbles) justified on G-R-O-W-T-H.

Partly because of the inclusion of SECB, and because of this week’s 2.25% pump, at 7,720, the PSEi’s PER should be at new record highs!

And a significant reason why the PSEi has become very pricey has been because of the wonderful orchestrated, concerted and synchronized and very rampant price fixing process.

As further proof, no less than 4 of the 5 days last week has exhibited a combination of afternoon delight maneuvering backed by marking the close pumps.

Like ad hominem politics, the essence for such actions has been one of the expectations of something for nothing. And something for nothing extrapolates to the predilection of short-termism where manipulations (and murder in substitution for drugs) would have only pleasant outcomes.

Of course, short-term orientation did not just appear out of the vacuum. They had to be shaped. They have been shaped by trickled down negative rates policy of the BSP that has only whetted on the casino impulses in domestic asset markets (stocks, bonds, and properties). And it’s also why addiction to one-way trades has impelled local punters to concoct desperate measures.

Duterte Lashes at EU; As Expected, S&P Threatens Credit Downgrades!

The Philippine government appears to be been digging itself into a deeper hole with her persistent recalcitrant foreign policy anchored on profane laced ad hominem and blackmail politics

It’s not just the US government now. The other day, EU was shown the “middle finger” (Washington Post September 21) and accused of being “hypocritical” (BBC September 21)!

Perhaps, the EU may be reacting to the summary execution of the daughter of a British baron, who was accused of “drug pushing” to celebrities (The Guardian September 19)

Ironically, even after radiating signs of backpedaling on the demand for US troops to withdraw where the leadership “acknowledged that his country needed American troops in the South China Sea”, the Philippine president “assailed the US over criticism on the war on drugs”. (Bloomberg September 21, 2016)

War on drugs has turned into a vicious war of words with foreign political peers.

Now I’d like to remind you of the potential ramifications of the swiftly unfolding saga of foreign policy gaffes by the administration. (September 13)

If the Philippine government makes real of the threat to undermine the interests of the shadow but powerful and highly influential political forces behind Washington—the neo-conservative and military industrial complex—then potential responses or repercussions may have already been set in motion. To repeat:

 -This would eventually prompt US rating agencies credit downgrades—especially if US military interests are compromised.

-This would reduce investment and portfolio flows from the US and allied nations.

-Credit flows will likely ebb too, thereby putting pressure on access to international credit markets and thereby tightening financing conditions. This will be baneful to a leftist government with a penchant for political spending profligacy: social spending (welfare state), bureaucracy, infrastructure, and most importantly, the military institution.

 The reduced access to credit and fund flows will likely accelerate on the unraveling of the mounting economic and financial imbalances inherited by this government from the previous two regimes.

-The Philippine government will be alone to deal with territorial disputes. (This should be a good thing if only the Philippines government’s response would be to increase trade rather than through brinkmanship politics)

-Finally, it would be a lot cheaper or cost effective for the US government to engage in covert operations to influence the domestic political environment than to pullout from the country. The US government may surreptitiously work to offset whatever leverage the administration has been building to countermand the US government’s influences in the country. The US government has been no stranger to the financing, influencing and orchestrating destabilization to regimes it perceives as hostile to its interests. Operation Gladio should be a stark reminder.

As for credit downgrades, the latest from the Nikkei Asian Review (September 22) [bold mine]

President Rodrigo Duterte blasted credit-rating agencies and international organizations on Thursdayafter Standard & Poor's warned of a downgrade if the Philippines' recent economic gains are reversed.

In an invective-laden speech, Duterte lashed out at his critics, including a Philippine senator, the U.S., the European Union and the United Nations for criticizing his war against drugs which has killed more than 3,000 suspected drug users and peddlers since Duterte took office on June 30.

"Do not keep on complaining about my mouth, because my mouth is not the problem. It cannot bring down a country, but it can erase a generation of right-thinking Filipinos," Duterte said.

Duterte's tongue-lashing expanded to credit-ratings agencies a day after S&P said the rise in extrajudicial killings could undermine the country's credit scores, due to "rising uncertainties surrounding the stability, predictability, and accountability of its new government."

The Philippines earned its first investment-grade credit score in 2013 as a result of governance and fiscal reforms.

First of all, credit downgrades are coming.

Second, the US government has now used the S&P to wag the proverbial geopolitical “stick” to contain the Philippines government. As such, current events bolsters or reinforces my case that the past Philippine credit upgrades had hardly been about “governance and fiscal reforms”, but about the prominence of US military interests here (Phisix: BSP’s Tetangco Catches Taper Talk Fever July 29, 2013)

Third, Philippine government’s balance sheet should be expected to massively deteriorate given the intensified demands of an expansionary government due to the war on drugs. The war on drugs, of course, represents nothing more than camouflage for an “Ochlocratic dictatorship” or a populist Police State (Welcome to the Police State August 18)

Fourth, “unpredictable” eh, according to the mainstream? Heck, leftist governments operate like clockwork!

International access to credit will narrow as the budget deficits are destined to bulge! This leaves higher taxes, ballooning local debt and the BSP (monetization of government spending or helicopters) as the key sources of financing!

What happens to the race to build supply, once interest rates start moving higher?! What happens to the US dollar short exposures by the listed and non-listed firms and by the government?

Oh, by the way, the USD peso closed the week at 47.99 to match the 47.995 January 26 2016 high!

C-H-A-N-G-E is indeed coming!

USD Php 50 here we come! (That's just the first target)