Tom Petty’s Freefalling remains the anthem of the Philippine peso as it hit another record low of 45.840 on Wednesday, before surging up to its strongest intraday level of 45.480 when the Bangko Sentral ng Pilipinas (BSP) intervened with an estimated $80 million, according to a top level source who spoke to FinanceAsia.
The peso closed at 45.500 - stronger than Tuesday’s close of 45.595. The BSP intervention reversed a 6-day freefall of the peso.
“The BSP tried moral suasion yesterday by calling up the banks to sell dollars,” reveals a treasury officer of a domestic bank. “But in the end, the demand was great, and the dollar became expensive. BSP finally decided to intervene.”
During the day, Manila’s forex traders sat listlessly while waiting for the Monetary Board, the highest monetary policy decision-making body, to come out of their meeting. This meeting was prompted by yesterday’s confidence shattering 32-month low performance of the peso. Speaking from New York, President Estrada has, in fact, asked for an investigation into the peso’s fall.
The Board decided to keep the overnight rates untouched and proceeded to intervene into the open market. Some “brotherly advise” from Executive Secretary Ronaldo Zamora was heard on the radio, saying what the central bank should do.
In a flagrant display of the inherent design defect of a matched order system such as the Philippine Dealing System, the country’s currency trading network suffered liquidity problems as demand outstripped supply causing the scarce dollars to be priced at record strengths.
Such a liquidity trap can be only vaporized by an exogenous liquidity source such as hot money inflow from overseas fund managers – which is wanting. This leaves the central bank as the only viable source of liquidity.
“We estimate that the BSP injected about $80 million into the PDS,” says a forex trader. This accounts for 49% of the $162.7 million traded on Wednesday. The central bank presence increased the trading volume by 5.3% over yesterday’s volume.
“But that’s only temporary,” says a trader. “The BSP cannot use all of the gross international reserves. The GIR is good for confidence but that money is not free for the BSP to use. The peso will again slide down.”
On the interest rate policy front, a banker has observed that: “The Bureau of Treasury (BTr) has allowed a 25-basis point rise in the two-year FXDN [foreign exchange-denominated notes]. What does this mean? Is the BTr ready for higher rates? If they change horses now, it will trigger a chain of events.”
“Currently the yield curve is very steep,” a treasury manager commented. “The 91-day is at 9%, the 6-month is at 10.25%, the 1-year is at 11.35%, and the 2-yr is at 12.5%. Since the 91-day is managed, if the central bank did not intervene, they would be forced to move the 2-year rates.”
According to market sources, the BSP started selling dollars at 45.10 and 45.11 last week.
How much of the PDS transactions are speculative? “Currently, not much,” says a trader at one of biggest banks. “Most of our trades are demands from corporate clients. And there are no inflows from abroad. There is a real demand for dollars.”
Banks in Manila are limited to long positions of $10 million, or 5% of unimpaired capital, whichever is lesser. This fact alone leaves a narrow speculation leeway for the PDS dealers.
The volume of the Philippine Dealing System ranges from $150-$160 million. Compared to the $1.5 trillion of currency traded daily, this amount is just rounding error, and puts the Philippines economy in perspective.
Yet it seems unsettling that only about 20 traders in the country govern how the currency moves – especially considering that the value of the peso reflects upon an entire population of 75 million and that thousands of foreign investors are observing the volatility of the peso market and wondering whether to invest.
This is the disadvantage of a closed trading system like the PDS. The market price is determined by 20 or so players, and this price becomes the basis of almost everything – including the perception of the performance of President Estrada.
