The central bank released $1.463 billion worth of foreign exchange (FX) in September in the form of swaps to keep the peso below P57 vis-à-vis the US dollar.
The Bangko Sentral ng Pilipinas (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.
Based on the latest BSP data which was September, its FX swaps remained in long positions which means the central bank has been accumulating US dollars to beef up the country’s gross international reserves. In effect, the swaps are its informal reserves.
FX swaps totaled $2.94 billion in September, lower than August’s $4.403 billion. The difference was $1.463 billion that the BSP unwound during the period.
Of the $2.94 billion, $2.085 billion were long positions in forwards and futures with residual maturity of up to one month while $855 million had residual maturity of up to three months.
In September 2022, the BSP only transacted $670 million of FX swaps in short positions.
The peso has remained strong as of Nov. 24 at P55.38 versus P55.67 the previous Friday. The peso in November has seen a lot of regaining lost grounds compared to P56.73 in Oct. 31.
For the market, the P57 rate seems to be the psychological benchmark when it comes to the exchange rate. The peso in September and October has been dealing with the effects of a strong US dollar as US yields also remain high, but analysts observed the BSP’s support as well.
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.
Meanwhile, the BSP resorts to FX swaps when the implied peso rate in the swap market is lower than the reverse repurchase or RRP overnight rate which means it is cheaper.
The BSP has a flexible and free-floating exchange rate policy, which means it is market-determined. However, it is prepared to participate in the exchange rate market to ensure orderly market conditions and to reduce excessive short term volatility.
In September, the country’s GIR stood at $98.1 billion. By end-October which was the latest data, the GIR increased to $101 billion. The BSP uses the GIR to defend the peso against speculative attacks.