Peso attains terminal velocity but where is the volume?

The peso closed at 45.530 to the US dollar Thursday, with minimal volatility but at heavily reduced trading volumes.

The Philippine Dealing System (PDS), through which the banks buy and sell currency, saw the peso open on Thursday at 45.550, weaker than WednesdayÆs close of 45.500.

On Wednesday, the peso sank to a record low of 45.840.

From there, the peso weakened further to 45.560 by 10am with a trading volume of only $16.0 million. Where were the players? At this volume, they were waiting for the Bangko Sentral ng Pilipinas (BSP), which on Wednesday injected about $80 million into the system. The BSP credited its intervention as the main driver for the pesoÆs reverse price action after a six-day fall. By this time, the average weight of the peso was 45.549.

By 11am Thursday, the traders started moving up the volume but it was the central bankÆs intervention that accounted for the increase. The BSP did not reveal how many dollars it had sold. By this time the PDS recorded about $61.5 million, a 284% increase in volume in a mere span of one hour. Up to 11am the weakest point of the peso was at 45.570 compared to the 45.560 an hour earlier. Its strongest value was at 45.530 û the same value as an hour earlier.

By midday, the peso had not gone beyond the boundaries set in the morning (45.530 û 45.570) but the volume increased to $88 million, a 43% rise over the previous hour. The traders felt the central bankÆs intervention and the peso stabilized at 45.549 on an average weight basis.

By Thursday 4pm, when the PDS closes, the market cleared the peso at 45.530, slightly weaker than its previous closing of 45.500 on Wednesday. But the volume was disappointing at only $110 million, 32% lower than WednesdayÆs volume of $162.7 million.

Since price actions, to be reliable, must be supported by volume, ThursdayÆs peso performance lacks the validity of a dependable act. If the central bank was the main actor in the market today, the price reflected at the PDS is not the price that would be reflected when it exits the market at some point. It is a fragile, temporary price.

The BSPÆs exit strategy from the currency market has to be a gradual withdrawal precisely because the trading volume on Wednesday was practically due to its presence. Otherwise, the market will suffer freefall once again. Whether the peso would have rebounded on its own as a technical correction after six days of freefalling or the BSPÆs intervention was really effective is now moot and academic.

But the BSP can not be in this market for long. It has to exit as it needs the dollars for fiscal use, not for trading. When that happens, there will be a price shock û but when it all clears, it would be the realistic price for the peso.