The central bank’s long positions in foreign exchange (FX) swaps went up by $1.67 billion in July to August after reviving activity in the second half this year.

The Bangko Sentral ng Pilipinas’ (BSP) FX swaps increased to $4.49 billion in August from $2.82 billion in July, and from $1 billion in June. Before June, the BSP has zero swaps.

These are long forward positions with residual maturity of up to one month only. Swaps have maturities of one month, three months and up to one year.

The FX swaps which was BSP’s unfiltered US dollar source, is a way for banks to increase its peso liquidity. The central bank uses FX swaps to intervene in the US dollar-peso market.

Before the COVID-19 lockdown was implemented in March, the FX swaps were less than $300 million in February.

Last year, there were $553 million FX swaps at end-December compared to zero transactions in 2018.

By central bank definition, FX swaps is the exchange of two currencies, agreed at the prevailing spot rate, and a “simultaneous commitment to reverse the exchange of the same two currencies at a date further in the future at a rate agreed on deal date.”

Movements in the FX swaps and derivatives market ultimately will impact on the levels of both peso and dollar liquidity and influences the exchange rate.

With the gross international reserves (GIR) recently topping $100 billion and a strong peso, FX swaps will get more active again. It is only in defense of the peso when it is weak that the BSP had to unwind its FX swaps.

The GIR includes FX assets amounting to $2.53 billion. As of end-September, the country’s total GIR was at $100.49 billion, up by $1.54 billion from August’s $98.95 billion and by $14.91 billion from same period in 2019 of $85.58 billion.

The peso is expected to remain strong at the P48.20-P48.70:$1 range this week, according to Metrobank’s market commentary, while BDO market research sees the peso at the P48.30-P48.60 in the near term.