The ongoing political uncertainty in the Eurozone, concerns of a Greek exit and escalating woes in Spain and Italy have pushed the US dollar up strongly last month. Moreover, the sell-off in the equities and commodities markets last month as economies around the world began to register slower growth (as shown in the recent global manufacturing PMI numbers) sent investors fleeing to the safe harbors of the US dollar.
Escalating EU debt crisis
The US dollar index had its strongest rally in seven months, gaining 5.4 percent in May alone. The main reason is that the euro which makes up 60 percent of the US dollar index collapsed on the weight of the escalating EU debt crisis. All eyes now are set on the outcome of the Greek elections set on June 17 even as a new crisis developed over the weekend as a union representing municipal workers who are a key part of the voting process threatened to strike. Meanwhile, the EU is now scrambling to stem the contagion after Spain sought a 100-billion euro lifeline to recapitalize its ailing banks.
Lack of alternative safe havens
The EU crisis, the slowdown of global growth and fears of a hard-landing in China led investors to sell equities & commodities last month to seek safer havens. But with other traditional safe haven currencies such as the Swiss franc and Japanese yen now out of the picture, the US dollar is the only safe haven currency left. Recall that Swiss decided to peg the Swiss franc to the euro last year after experiencing massive capital inflows and strong currency appreciation. Likewise, the Japanese authorities continue to aggressively intervene in order to protect their domestic and export industries from a stronger yen.
Major currencies fall in May
The euro, which is down 7.2 percent since registering a peak in February, has dropped to its lowest in two years. Meanwhile, the Australian dollar dropped below parity in May and joined the Canadian dollar which likewise slid below parity last month. Following the sharp sell-offs in May, all the major currencies are now down year-to-date against the US dollar.
Source: Bloomberg, Philequity Research
Philippine peso remains stable
In the current risk-off environment where investors favor the US dollar against most risky assets, the Philippine peso remains one of the most stable currencies in the world. Although the peso declined last month concurrent with the drop of other currencies vis-à-vis the US dollar, it is down just 2.8 percent from its peak registered last Febr. 9. The peso’s performance is way better compared to the average declines from peak of 6.7 percent for major currencies and 5.4 percent for Asian currencies.
In fact, the Philippine peso is the best performing Asian currency year-to-date. Despite a generally strong US dollar, the peso is much stronger, gaining 1.4 percent against the greenback year-to-date.
Source: Bloomberg, Philequity Research
Peso continues to trade at its sweet spot
In one of our previous articles (see Peso’s Sweet Spot, January 30, 2012), we said that:
“At 42 to 45, we believe that the peso is in its sweet spot against the US dollar. The BSP likes the exchange rate to stay in this range because it is good for the economy. Philequity also likes the peso to stay here because it is likewise good for the stock market.
We do not want the peso to be too strong because if it appreciates too much, it will surely hurt the OFWs, the exports, the BPO industry, and the export sector. At the same time, we do not want it to be too weak more so when inflation starts going up which is detrimental especially to the poor.
Between 44 and 44.50 are good levels to buy the peso.”
Philippine Peso (2010 to present)
Source: Technistock, Philequity Research
The peso continues to trade at its sweet spot. And with $76 billion of gross international reserves as of May, we expect the Bangko Sentral ng Pilipinas (BSP) to be clearly at the helm to backstop any sharp volatility that may arise from further escalation of the EU debt crisis. The latest GIR figure is enough to cover 11.4 months worth of imports and 6.6 times worth of short-term foreign debts.
Stronger peso, a vote of confidence
Last week, we noted that the Philippine economy grew strongly in the 1st quarter of 2012 in sharp contrast to the slowdown happening around the world (see Philippines, One of the Few Bright Spots Left, June 4, 2012). We expect this growth to be sustained given the major investments lined up in the pipeline (PPP projects), the government’s healthy revenue growth, the manageable fiscal deficit and the high trust rating in the Aquino government. As a result, the Philippine stock market continues to be the best performing market in Asia and currently ranked among the top 10 in the world on a year-to-date basis.
The peso is one of the key parameters that show whether our economy is stable and resilient. This is the reason why we not only set our sights on the stock market and economic growth indicators, but on currencies as well.
Hence, the stronger & more stable Philippine peso is another vote of confidence for the country. So while the Philippine economy will not be totally immune from any external crisis, we are confident that our stock market and economy will continue to be resilient and be one of the first to bounce back.
For further stock market research and to view our previous articles, please visit our online trading platform at www.wealthsec.com or call 634-5038. Our archived articles can also be viewed at www.philequity.net.