The Bangko Sentral ng Pilipinas (BSP) has revived activity in its foreign exchange (FX) swaps at the end of the third quarter this year, the first time there was movement in two years.
Based on central bank data, its short-position FX swaps reached $970 million in October, of which $480 million have one month maturity and $490 million have residual maturity of up to three months.
This was a higher forwards and futures in foreign currencies compared to the previous month’s $670 million. In September’s FX swaps, $575 million have maturity of one month to three months, while $95 million were released to the market in October.
For the entire 2021 there was zero aggregate short and long positions in the BSP’s FX swaps. The only other activity during the pandemic was in September and October 2020, and in February of the same year.
Swaps usually have maturities of one month, three months and up to one year. There was no one-year maturity since 2018.
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 2020, the FX swaps was less than $300 million which was in February 2020. In 2019, there was $553 million FX swaps compared to zero transactions in 2018.
By central bank definition, FX swaps is the exchange of two currencies at the prevailing spot rate. 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.
The BSP uses its swap positions to unwind or release foreign currency into the system as a defensive mechanism against speculative flows or as tool to intervene in the exchange market.
FX swaps involves the actual exchange of two currencies – in principal amount -- on a specific date at a rate agreed on the deal date or the first leg, and a reverse exchange of the same two currencies at a date further in the future or the second leg at a rate different from the rate applied to the first leg, as agreed on deal date, according to the BSP.
As a strategy, the BSP supplements its FX accumulation by transacting in long positions in forwards and futures but it also uses the swaps to sterilize its US dollar purchases.
In recent months, the BSP withdrew $15 billion from its US dollar reserves to smoothen exchange rate pressures as well prevent the peso from depreciating past P60 vis-à-vis the greenback.
The peso’s record weakest level was at P59 on Sept. 29. The BSP has been selling US dollars to prop up the peso. As of Dec. 23, the peso was trading at P55.15.
BSP Governor Felipe M. Medalla last last week that since the peso has regained lost grounds in November and December, they could comfortably purchase US dollars again.
The BSP’s FX gains surged to P65.64 billion in the first nine months of 2022 from just P7.05 billion in 2021. These FX gains are realized gains from fluctuations in FX rates arising from BSP’s foreign currency-denominated transactions.
As of end-October this year, the country’s gross international reserves stood at $94 billion, way below its starting level of $108 billion this year. The lowest reserves was registered at $93 billion last September due to US dollar selling to curb exchange rate volatility.