Weak peso jacks up T-bill rates

The continued weakening of the peso against the dollar has jacked up interest rates, with the yields for the benchmark 91-day Treasury bills (T-bills) rising by 4.4 2 basis points to 8.77 percent yesterday from the previous week’s 8.728 percent.

At the Philippine Dealing System (PDS), the battered peso closed at a five-and-a-half month low of 52.700 or 30.5 centavos lower than Friday’s close of 52.395 against the greenback.

Traders said the peso immediately dropped by 11.50 centavos against the dollar when trading opened yesterday before hitting a low of 52.730 in mid-afternoon trading. Total volume traded was $93 million.

The Bangko Sentral ng Pilipinas (BSP) denied it was in the market, but some traders believed it sold around $20 million to soften the peso’s fall.

"The central bank initially started selling at 52.500 but gave up the fight because it could see demand was not driven by speculation but was real," traders said.

Traders confirmed the BSP’s statement that there was a huge corporate demand, especially among the oil companies.

"There was clearly a demand, it is the import season and the trend should last till next month before it tapers off in September when remittances from overseas Filipino workers start coming in," a trader from a local commercial bank said.

In yesterday’s auction at the Bureau of Treasury (BTr), yields for the longer-term T-bills were also up, with rates for the 182-day T-bills rising by 16.2 basis points to 9.942 percent from 9.780 percent last week. The 364-day T-bill rate ended 12.9 basis points higher at 11.221 percent.

The auction committee made a full award for the 91-day T-bills but made only partial awards for the six month to one-year T-bills at P595 million and P885 million, respectively.

Deputy National Treasurer Eduardo Mendiola said the rising interest rates were affected by the development in the spot currency market.

"We expected the sideways movement, that is what happens when the foreign exchange fluctuates," Mendiola said, adding that yesterday’s auction was a boring day as "there was neither bad news nor good news."

He said the system is still liquid, but added the liquidity is clearly not going in the direction of government securities.

"Liquidity will come back. Banks cannot afford to stay away for long," Mendiola said.

He said that despite the rejection of some tenders by the BTr, "those (bids) that were accepted have enough critical mass to set the interest rates, but we were able to temper the upward movement."

The local financial market was also reacting to the decision of the BSP not to cut its overnight borrowing and lending rates despite the US Fed’s decision to cut its interest rates by another 25 basis points.

"Had the central bank cut rates, interest rates would have also gone down," Mendiola said.

Bank of America said recent poor economic numbers against a backdrop of rising fuel prices are adding to the weak sentiment on the peso.

"While (the fuel price hike) is unlikely to significantly impact on inflation numbers, it will help the central bank justify not cutting interest rates further for fear of energy price-driven inflation." Bank of America said.

The peso is expected to extend losses in the coming days, possibly testing 53 to the dollar, unless the BSP mounts an aggressive defense of the local currency, traders said.