The central bank’s hawkish or tightening bias is good for the peso-US dollar rate because it props up the local currency despite some volatility, according to Bangko Sentral ng Pilipinas (BSP) Governor Eli M. Remolona.
Remolona also assured the spot market that it will maintain a reliable and credible forward guidance to keep the exchange rate as market-determined as possible, with BSP intervention from time to time, when needed.
It is a relatively small presence in the exchange market, he added. Intervention is not their main policy as far as foreign exchange (FX/forex) market is concerned, but forward guidance, meaning hints of where the BSP monetary policy is heading to guide markets.
“Forward guidance is more effective,” he reiterated. “Basically it’s a six-week position,” he added.
Remolona is referring to the period where the US Federal Reserve will decide on a policy action or not, and the Monetary Board of the BSP’s response six weeks later. In between this period, when the market is awaiting and speculating what the BSP will do, the exchange rate reacts. This is where forward guidance is crucial, said the BSP chief.
He also said that intervention is merely an overnight position and will ease pressures only on the day itself. The BSP’s six-week position and its forward guidance will have more of an impact in calming markets.
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.
At the P56 to the US dollar level, the peso movement is stable in that it moves in both direction, either to appreciate or become stronger than the greenback, or it depreciates or closing weaker versus the US dollar at the end of the trading day.
The BSP call this a normal forex day, driven by business operations.
Last week, Remolona already said that the peso is not weak vis-à-vis the US dollar. The more appropriate narrative is that the US dollar is strong and that most Asian currencies, not just the peso, are depreciating.
He also noted “some volatility, more than usual”. The peso did touch P56.99 as intra-day peak and almost breaking P57 last week.
Remolona said the hawkish signals from the US Fed’s minutes from its July 25 to 26 meeting has affected the spot market volatility. The Federal Open Market Committee (FOMC), which decides the monetary policy of the US Fed, has hiked US rates by 25 basis points (bps) last month. The FOMC minutes indicated that another rate increase may be coming.
Remolona said earlier the BSP has the tools to stabilize the peso-US dollar rate and keep it at P55 or below this level in the next months.
Monetary policy, which is an inflation-fighting tool, is an effective one but Remolona said this has side effects on the exchange rate.
The other more active tool is the BSP’s intervention in the exchange rate market while the third tool is the pre-emptive forward guidance.