BSP intensifies move to curb peso speculation
Bangko Sentral ng Pilipinas (BSP) Governor Felipe M. Medalla said they have enough toolkits to prevent speculative peso-US dollar trading or to defend the local currency from undue exchange rate fluctuations and vowed to be more vigorous in monitoring the spot market.
The BSP has no need at this time to create new and additional foreign exchange (FX) policy or rules to curb speculative activities as the spot market continue to hit the P59-level since Sept. 30. The peso has fallen to the P59 closing rate vis-à-vis the US dollar several times this month but BSP intervention has kept the peso from depreciating past P59.
Medalla however said that these days, they apply more potency in detecting speculative activities.
“It’s part of what we can do but with more intensity,” he replied in a text message when asked if the BSP is seeing an alarming rate of speculative attacks against the peso.
To avoid “extreme” and substantial changes in the exchange rate, the BSP intervenes in the spot market to strengthen the peso by releasing US dollar liquidity. It withdraws from the country’s FX reserves or the gross international reserves (GIR) to do this. Since January this year, the GIR has lost $14.69 billion or from $107.69 billion to $93 billion as of end-September.
Medalla said they do not need to introduce new rules to monitor currency speculation even as the peso continues to depreciate amid higher US interest rates which is favoring the greenback.
To add more teeth in monitoring banks and non-banks’ US dollar selling or buying, the BSP ask more reports from the market. “(We) just ask them more detailed reports,” said Medalla.
Last week, Medalla reiterated that exchange rate intervention and raising BSP policy rates are two primary monetary policy measures that they are undertaking to stabilize the peso-US dollar rates.
He said the BSP rate should at least be 100 basis points (bps) higher than the US interest rates. As of Sept. 22, after raising the key rate by 225 bps since May, the BSP benchmark rate is currently at 4.25 percent versus the US Federal Reserve’s three percent to 3.25 percent.
Since the BSP uses a flexible and free-floating exchange rate policy, it remains market-determined. The BSP therefore does not target a peso level versus the US dollar nor do they announce forecasts. But as a consequence of a higher BSP rate though, it will help alleviate pressures off the peso which in turn, will curb inflationary impulses due to steep global commodity prices.
The BSP stands ready to participate in the FX market only to ensure orderly market conditions and to reduce excessive short term volatility in the exchange rate.
They are also prepared to utilize other tools to respond to fluctuations in the exchange rate to ensure that legitimate demand for foreign currency is satisfied.
The BSP has revised the limit to banks’ net open FX positions last year to increase FX liquidity, as well as curtail speculative activity and to make sure that transactions are legitimate and has the appropriate risk governance.
Banks’ net open FX limit was raised to 25 percent of qualifying capital or $150 million, from the previous limit of 20 percent of unimpaired capital or $50 million, whichever is lower.
The last time the oversold/overbought FX limits of banks was adjusted was in 2007. The BSP adjusted oversold/overbought limits to “ensure that FX risk does not threaten a bank's safety and soundness” and to “reinforce the BSP’s expectation for banks to faithfully adhere to ethical standards in carrying out their FX transactions”.
A bank’s net open FX position is the amount of net assets and/or liabilities denominated in foreign currency that it holds. The BSP increased the limit because demand for FX has grown in volume with the growth in trade transactions and investments following several rounds of FX policy amendments.
Basically, an overbought position is when banks’ FX position leads to an extended upside price movement that is consistent and with no significant retreat. The oversold position is the opposite, or downward price movement. Last year, when the net open FX position was revised, the peso was at the P47-48 level.
The BSP will be closely monitoring banks’ compliance with the overbought/oversold limit and it will “pay particular attention” to authorized agent banks (AABs) that breach the limit five times within a 20-business day period.
Instances of breaches that will be evaluated will be based on frequency and the gravity of the breaches, and the underlying cause or causes of the breaches and the extent to which these are consistent with the AAB’s declared business strategies, said the BSP.
To be evaluated are also the strength of the AAB’s risk management system and actions taken by the AAB, if any, to address the breaches and restore compliance with the limit.