The Philippines: A running case study on monetary policy?

The Philippines has become a running case study on monetary policy as the Bangko Sentral ng Pilipinas (BSP), the Philippine central bank, kept forex speculators at bay and forex trading crawled to a virtual standstill.

The Philippine peso weakened slightly on Monday to Ps45.510 as forex traders acted more like spectators than speculators in the country’s Philippine Dealing System (PDS) through which the interbank market executes currency trades. The day’s volume was only $56 million.

In another development, the Philippine treasury entirely rejected all bids for the 182-day treasury bills even as the new 1% rise in overnight rates took effect. The government considered the bids as “speculative”.

Despite being at record highs lately, the gross international reserves (GIR), currently at $15.4 billion, is not a defense mechanism the central bank can depend on. Contrary to what Vice President Gloria Arroyo-Macapagal claimed last week, the GIR does not provide much firepower to prop up the currency.

Unlike Hong Kong, the Philippines could not sustain an interventionist policy against offshore dollar traders. But it can intervene in the local interbank dealing system as it did last Wednesday. The BSP’s presence though creates market uncertainty. “As long as the BSP is there in the market the peso prices will always be artificial,” says a local head of currency trading.

Raul Roco, senate chairman on banking and currencies has said the country's reserves would not last seven days in an all-out defensive war against the peso.

At Monday’s treasury bill auction, the first one since the new interest rate regime, Leonor Briones, the country’s treasurer, said the government rejected all the bids for the 182-day treasury bills as that would have meant an 83.7-basis point increase. A total of Ps650 million was tendered for the 182-day bill.

The bellweather 91-day bill hit a 15-month high of 9.119% but the government only accepted half of the Ps2 billion offered.

The 364-day bill reached 11.705% from 11.270% last week after the government rejected Ps1.17 billion out of the Ps1.66 billion tendered.

Blow by blow

The forex traders came in Monday with no definite currency price action in mind. The new overnight rates, 1% higher, became effective that day and the auction for the treasury bills was expected to move upwards. But whether such overnight rate increases will be sufficient to prevent another slide of the peso that morning was uncertain.

When the PDS market opened Monday, there was virtual silence. All the forex traders were looking at their screens waiting for the opening trades to guide them, but there was no trade. In the world currency markets, currency prices change almost 20 times per second. In contrast, on Monday, there was no PDS trade on the opening bell. Ten minutes passed – no trade. Another ten minutes passed but still the forex traders were reluctant to cause the first price action. Another ten minutes passed and by this time, it was certain the traders were afraid that the BSP will run them over. Each trader was waiting for everybody else to make the first trade.

Finally, at 10:16 am, an impatient soul ventured with a $500,000 trade at Ps45.540. The opening benchmark was set. It pegged the peso much weaker than Friday’s close of Ps45.495 to the dollar.

In the ensuing hour, the herd of traders followed the lead of the impatient soul, sending the peso to a strongest level of Ps45.510 for the hour with a volume of $11 million – 2,100% over the previous hour’s volume.

By 12 noon, the volume rose to $23 million, hardly anywhere near what can be called as any country’s normal trading volume. The average weighted price of the peso was Ps45.541.

By 3pm, the volume almost double to $44 million, still reaching a weak point of Ps45.555 and a strong point at Ps45.495 which was Friday’s closing level. At this levels and volume, the BSP did not have to intervene.

At the closing time of 4pm, the PDS volume reached an extremely low volume of $56 million for the day –  41% lower than Friday’s, 49% lower than Thursday’s, and 66% lower than Wednesday’s.

Srongest level for the day: Ps45.490. Weakest: Ps45.555. Closing level: Ps45.510 compared to Friday’s Ps45.495.

This insignificant volume signifies the uncertain float of the peso with the advent of the BSP’s newly adopted strategy of raising the overnight rates to defuse the speculative war with the forex traders.

“We are not hiking interest rates to defend the peso,” thus declared Rafael Buenaventura to local media. “It is more meant to quell expected higher inflation rate for next year.”

Proactive thinking – looking at next year while the fire rages today.