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PHILIPPINES - In Brief 23 Aug 2017 by Romeo Bernardo

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Over the course of 10 trading days in recent weeks, the peso lost P1.30 against the US dollar depreciating from P50.19/$ to P51.49/$ on August 22, its weakest so far. Analysts have been scratching their heads not so much over the direction of movement (which most had expected in light of weaker external balances), but the sharpness of the depreciation (which had no apparent immediate cause). And the peso's losses occurred not only vis-a-vis the US dollar but also against a basket of trading partner currencies. (See chart) In our last two Quarterly Reports, we took note of what we sensed was an emergent policy bias for a weaker peso, associated with the appointment of new BSP Governor Nestor Espenilla, a career central banker who is nonetheless younger, more energetic and less rooted to the traditional view that equated a strong currency to lower inflation and a strong economy. Governor Espenilla is also working with a Monetary Board that has vocal members opining that peso weakness favors the economy and government finances, including reducing the negative carry of the BSP’s huge pile of foreign reserves. Interestingly, we have also heard analysts speak of the likely end of the era of the "Tetangco put," coined by foreign exchange traders who had gotten used to the BSP intervening to prop up the value of the peso during the term of former governor Amando Tetangco. The question thus arises, were the recent sharp peso movements a case of market players testing where the new BSP Governor's tolerance for exchange rate volatility lies? Last Monday, a holiday in the Philippines, Governor Espenilla issued a statement echoing economic managers' investment-led growth strategy, ...