Peso rises as central bank adjusts strategy

The peso rises, the central bank capitulates, and the traders are scared away.

"The central bank is doing a good job in a bad environment," declares a very senior officer from a foreign bank in Manila even as the Philippine peso closed stronger at Ps45.495 to the dollar on Friday when the Bangko Sentral ng Pilipinas (BSP) intervened - again scaring forex traders away.
At the same time, after deciding last Wednesday to leave interest rates untouched, the BSP capitulated to market realities and changed its course by announcing a round of 100-basis point increases in overnight rates.

The peso closed stronger at 45.495 on Friday at the Philippine Dealing System (PDS), the country’s interbank trading system for currencies, compared to its closing level of 45.530 on Thursday and 45.500 on Wednesday.

Despite the peso’s strong Friday performance, volume validation for this price was wanting, with only $95 million.

On the other hand, while the Monetary Board, the highest monetary policy body in the country, publicly announced on Wednesday it would not change interest rates, it finally capitulated to market realities on Friday by raising overnight rates effective Monday, September 11.

As expected, the move to raise interest rates elicited mixed reactions from analysts.

One senior officer at a large Manila bank says he expected the rate increase. "This gives the BSP more flexibility. They cannot always rely on the GIR [gross international reserves]. It’s not all freely available to protect the peso.

"The government keeps saying that they have a healthy cash flow," continues the banker. "At any rate, things seem to be okay. The IMF has accepted the government’s promise to stick to the Ps62.5 billion deficit. There will be no more foreign borrowing this year. Furthermore, the focus for next year is domestic funding."

Rafael Buenaventura, the central bank governor, announced: "The Monetary Board today decided to raise the Bangko Sentral ng Pilipinas’ (BSP) policy rates by 100 basis points effective Monday, 11 September 2000. The increase brings the overnight borrowing (RRP) and lending (RP) rates to 11.0% and 13.25% respectively. The three-tiered system for overnight placements of banks will continue to be implemented as follows: an overnight RRP rate of 11.0% will be offered for placements of up to Ps5 billion; 9.5% for the next Ps5 billion, and 8.0% for placements in excess of Ps10 billion."

In response to the rise, one head trader of a local bank said: "One percentage point is not much. I’ll just wait and see."

But a high-ranking treasury executive at a Manila bank says: "The BSP is not really changing horses. It has the right to intervene to smoothen the volatility. They don’t intervene every day, anyway. It is consistent with what they were doing before."

"The BSP is being overly criticized," a trader in a local bank agrees. "It is doing a good job in a bad environment."

Blow by blow

The peso dropped to a 32-month low on Wednesday at 45.840 prompting the central bank to inject liquidity to the tune of at least $80 million, according to a top level source. The estimated total intervention for last week alone is $200 million. Early Friday morning, the Manila banks traded cautiously, knowing the central bank could force its way into the PDS at any time, as happened on Wednesday when the BSP accounted for almost half of the $162.7 million traded that day.

The traders’ reluctance showed when the peso opened at 45.600, weaker than the previous day’s close of 45.530, but with a miniscule volume of $0.5 million. Given this volume, this price was unstable.

By 9:45am, the volume rose to $1.5 million with an average rate of 45.620, strongly revealing that the previous two day’s intervention had scared off traders.

"I’m not doing anything," says the head trader of a local bank. "Like other traders, I’m out of the market - I don’t want to be run over by the central bank."

The volume increased 300% barely minutes later when it reached $6 million with an average price of 45.631. The peso’s weakest point by this time was at 45.640 and its strongest was at 45.600. It was time for the central bank to intervene.

By 11am, the volume reached $12.5 million, doubling from the previous hour, with the peso’s weakest point being 45.650.

The next hour saw the peso rise to an average rate of 45.607 backed up by a $42 million volume. The central bank intervened sending the peso to its strongest rate of 45.550 since the morning.

Finally, when the PDS closed, the peso at stabilized at 45.495 which actually was also the strongest performance for the day. The average weight for the peso: 45.589. The volume for the day? Only $95 million - 16% lower than Thursday’s volume and 75% lower than Wednesday’s $162.7 million when the BSP first intervened heavily.