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Manila Bulletin devider Business devider Banking & Finance devider Peso slides back to P56:$1 territory

Peso slides back to P56:$1 territory

Published Dec 13, 2023 09:04 am

The peso vis-a-vis the US dollar is back at the P56 level on Wednesday, Dec. 13, closing at P56.055, depreciating by 48 centavos from P55.607 the day before.

The spot exchange rate market may be anticipating another “no change” decision from the Bangko Sentral ng Pilipinas’ (BSP) Monetary Board on Thursday, Dec. 14, when they meet for the last time this year to discuss the overnight key rate, currently at 6.5 percent.

On Wednesday, the peso opened at P55.67 and traded to a low of P56.08 before closing at P56.055, according to data provided by the Bankers Association of the Philippines.

The weighted average rate was at P55.859 from P55.604 previously. Meanwhile, total volume reached $1.604 billion from $1.005 billion.

The peso has been strong at the P55 level for most of November after it briefly slipped to P56 last Nov. 7 after the government reported a lower inflation rate of 4.9 percent for October.

The peso is not likely to remain at the P56 level for long, according to some market observers.

Last Oct. 26 the Monetary Board raised the policy rate by 25 basis points in an off-cycle move, and then proceeded to keep it untouched during its Nov. 16 policy meeting.

The Monetary Board decision to raise the policy rate in an off-cycle move has given the market more confidence that the peso will remain resilient versus the strong US dollar.

Meanwhile, the BSP is intervening in the exchange rate market via its foreign exchange (FX) swaps, one of its open market operations to provide FX liquidity.

In October, the BSP unleashed $1.221 billion of FX liquidity using the swaps. This brings the total to $2.684 billion of FX released by the BSP in September and October using the forward leg of currency swaps, based on BSP data.

Swaps involve 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.

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 central bank 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.

The BSP has always emphasized that it 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.

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