The central bank’s foreign exchange (FX) swap operations increased by $163 million to $4.870 billion in March from $4.707 billion in February, indicating that the Bangko Sentral ng Pilipinas (BSP) could be slowly building up its market intervention.
The FX swaps are all in long positions. Holding long positions is a signal that the BSP is buying more US dollars to prop up the peso versus the greenback.
Basically, the BSP conducts FX swaps to sterilize its reserves accumulation. As of end-March, the country’s gross international reserves (GIR) totaled $104.067 billion, up from end-February’s $101.994 billion.
The BSP considers the current GIR more than adequate US dollar stock to defend the peso which has depreciated past P57 in recent weeks, but is slowly regaining strength.
However, BSP Governor Eli M. Remolona Jr. has maintained that at this level, the peso is not weak but merely adjusting to market conditions. “Unless the movements are very sharp, we tend to allow the adjustment to happen,” he said previously. As of May 3, the peso stood at P57.345, stronger than P57.535 the day before.
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.
The FX swaps is one of the central bank’s intervention techniques or measures. FX swaps are aggregate short and long positions in forwards and futures in foreign currencies vis-à-vis the domestic currency including the forward leg of currency swaps.
Based on central bank data, transacted forwards and futures have a maturity breakdown of up to one month and more than one month to three months. Of the $4.87 billion in March, $2.429 billion has residual maturity of one month and $2.441 billion has the longer maturity of more than one month.
Normally, the BSP unwinds its FX swaps which means it is releasing US dollar liquidity into the market. It 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.
British bank HSBC in a recent commentary said the US dollar has strengthened “quite considerably with sticky inflation in the US pushing the idea that, perhaps, the Fed (US Federal Reserve) may keep rates tight for longer.”
The bank’s research group said that amid a deteriorating US dollar-peso market, the BSP has signaled that it will cut the target RRP or the key rate by the last quarter of 2024 after a predicted third quarter US Fed rate cut.
Remolona has said that he could postpone the easing to the first quarter of 2025, depending on the inflation outlook.
Meanwhile, HSBC said market players already expect headline inflation to breach the government target range of two percent to four percent in the next few months due to negative base effects. The question is how long will inflation remain above four percent.
“To better support the peso and tighten one's grip on inflation expectations, the BSP will likely stick to its word and begin its easing cycle late this year. And the BSP can easily do this with growth robust,” said HSBC, adding that the “recent depreciation of the PHP should also help support the consumption of households with overseas workers as the purchasing power of each USD remitted increases.”