The peso is a clear market victim of the nearly three-week-old conflict in the Middle East.

Yes, Virginia, much like the exchange of drones and ballistic missiles between the United States-Israel and Iran, the attack on the peso has been seemingly incessant. This has turned the local currency into one of the worst-performing in Southeast Asia.

This decline persists despite the intervention of the Bangko Sentral ng Pilipinas (BSP) in the spot currency market. The BSP’s goal is to temper “large swings... smoothen volatility, and maintain orderly conditions” rather than “defending any specific level” that could, in turn, “affect inflation.”

From what I’ve heard in the banking alleys, the BSP has engaged four financial institutions—two domestic and two foreign banks—to sell dollars to prevent the peso from crossing the ₱60 threshold.

But as I write this, the peso has already breached that level during early morning trade, dipping to a low of ₱60.30 from Wednesday’s closing rate of ₱59.52 to a dollar.

With increasing concern over the peso’s declining value as the Middle East war rages, more corporations—specifically importers—are bracing for higher raw material and fuel costs. This has resulted in a stronger appetite for hedging instruments. One such preferred product is the off-market currency swap, a form of non-deliverable forward.

In step with the escalating conflict, a surge in the volume of these structured financial product transactions has been noted. Yes, Virginia, nearly six weeks after I wrote my first piece on this issue, an increased daily appetite for off-market currency swaps has been observed—a development that may potentially put additional strain on foreign exchange reserves.

As one bank treasury official explained: Off-market currency swaps are often difficult to value accurately, especially during volatile market conditions. Increased volume can raise liquidity risks for banks, as sharp currency fluctuations may trigger margin calls and potential cash flow issues.

High volume can also create hidden vulnerabilities, generating liquidity mismatches and shifting interest expenses into trading losses while the Net Interest Margin (NIM) increases.

It provides a cheaper cost of funding, allowing a bank to generate peso deposits with no intermediation cost. This lowers interest expenses and dramatically improves its NIM, a key profitability metric for financial institutions.

My research shows that the foreign exchange losses of one bank have been on an uptrend. From slightly above ₱6 billion in 2023, the level more than doubled the following year, hitting ₱14 billion to ₱14.5 billion.

On the other hand, that bank’s NIM continually improved from slightly over ₱4.20 billion in 2023 to nearly ₱14.5 billion in 2024, and inched toward ₱4.6 billion in 2025.

From what I’ve heard, medium and small banks—and even their “big brothers” with derivatives licenses—are currently seeking clarity from the BSP on whether off-market currency swaps are allowed, as there are no specific rules governing this so-called hedging instrument. The question being asked: Is the shift of interest expense to trading losses acceptable to regulators?”

In light of the ongoing war, the BSP is now closely monitoring off-market currency swap transactions and studying their implications on inflation and the weakening peso.

This corner will keep you updated as the situation unfolds.