Peso fall prompts BSP to act vs speculators

The peso again fell to its lowest level in almost 13 years in intraday trading on Friday, but recovered to end stronger on the back of what bankers described as Central Bank intervention in the foreign exchange market.

The local currency sank to as low as P53.975 to the dollar in afternoon trading, but closed at P53.73:$1, stronger than the P53.80 level of the previous day.

Trading volume was heavy with $956.9 million changing hands during the day.

As this developed, Bangko Sentral ng Pilipinas (BSP) Governor Nestor Espenilla Jr. said regulators will take “all actions necessary” against “speculative activity by market participants” who have pushed the currency down in recent weeks.

The BSP also unveiled a dollar hedging mechanism introduced during the 1997 East Asian financial crisis in a bid to cushion the peso’s precipitous drop. The mechanism was used heavily during the financial markets turmoil in the lead up to former President Joseph Estrada’s resignation in 2001.

No rush

Espenilla said the Currency Risk Protection Program (CRPP) would be made available to eligible corporations with foreign exchange obligations based on more liberalized rules.

With this scheme, regulators hope that big corporations with future dollar needs will not rush to buy them early, thus aggravating the peso’s weakness.

The CRPP is a nondeliverable forward hedging facility which is aimed at alleviating demand pressures in the foreign exchange spot market from borrowers seeking to hedge their future foreign exchange exposures.

Under the facility, parties agree that, on maturity of the forward contract, only the net difference between the contracted forward rate and the spot rate shall be settled in pesos. The BSP will make the CRPP available to eligible borrowers through the commercial banks.

Record inflation

Espenilla said the BSP would take “strong immediate action using the full range of instruments in its toolkit” to respond to emerging threats of inflation and inflation expectations.

The regulators’ move to buttress the peso is also meant to address the country’s record-high inflation rate of 6.4 percent in August, as a weak currency pushes up the cost of imported goods, including petroleum.

“The follow-through actions will also address the other threats (resulting in) higher inflation, such as excessive exchange rate volatility not consistent with underlying macroeconomic fundamentals, to ensure that inflation returns to its 2 to 4 percent target over the policy horizon,” Espenilla said.

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