Thursday, 25 March 2010

Peso and PSE both going higher

John Mangun
Outside the Box
Business Mirror

Please stop reading this and turn back to the front page of the BusinessMirror. Notice the two graphics on the right-hand side showing the 30-day movement of the peso and of the PSEi or Philippine Stock Exchange index. I will wait right here.

Notice anything interesting? How about the correlation between the movement of the peso and the stock market?

This is something that I have been talking about for years. Peso up, market up; peso down, market down.

The graphics on the front page show the movement of both since February 20. During that period, the peso appreciated from about 46.50 to about 45.50. The stock-market index rose from approximately 3,015 to 3,084. The percentage changes are interesting, too. Peso up 2.15 percent; stock market up 2.29 percent.

Please do not think this is unique or coincidental. On October 28, 2009, the peso was trading at approximately 48 to the dollar. The PSE index closed around 2,000. Since October 2009, the peso has appreciated by 5 percent; the market by about 50 percent.

It would be nice if the percentage increases over the last six months were the same as the PSE. Then I could do a big “I told you so!” However, the price of the peso is controlled and manipulated by the Bangko Sentral ng Pilipinas (BSP) while the stock market is controlled by individual buying and selling.

In effect, the stock market has been telling us that the peso is due for some significant appreciation in the future. The rise of the peso in the last month is an indication that the BSP is beginning to let the peso move slightly more toward its real value. And what is the “real” value of the peso? Probably closer to 35 than 45.

Now, of course, do not expect to see the peso near 35 to the dollar anytime soon. That kind of movement and volatility would not be good for the economy at all. Yet in truth, the peso is probably undervalued by as much as 30 percent in relation to the US dollar. This is based on the purchasing power of the peso in comparison to the US dollar. All Asian currencies are undervalued. That is because Asian countries are in fierce competition for their exports, and one way they can (or think they can) better compete against one another is through maintaining a cheap currency. Perhaps more important, China ’s currency is undervalued by about 50 percent. The other Asian countries cannot afford to allow their currencies to rise to a true value against the dollar while China continues to keep a cheap renminbi. If the Chinese currency remained where it is and the peso appreciated to 35, there would not be any locally made product left as Chinese imports would absolutely take over the local economy of the Philippines as well as all our other neighbors.

Yet the charts of the peso and the Philippine Stock Exchange are both at a critical point. That critical point is a breakout to the upside that forecasts a strong and prolonged upward movement.

The key price for the PSE composite index is 3,120. A break of 3,120 immediately targets 3,250, then 3,350, and finally 3,600/3,800. For the peso, the breakout level is 45.50 which targets 44, then 42 and to 40 to the dollar.

Notice that we are talking about both the peso and the PSE moving to levels not seen since the good old days, pre-financial crisis, in 2008. Beyond those prices, we are looking to a move to pre-1997 Asian crisis level.

Could that happen? Of course. In 1997, the US economy and dollar were at the top of the game. The Dow Jones was making new historic highs practically on a daily basis. Gold was trading around $325 an ounce. The Japanese yen was 125, not 90. The euro traded in 1999 at nearly par to the dollar, costing $1.07 to buy one euro, not $1.35 as today.

As money fled then from Asia to the West, so, too, will funds flee the West and come to Asia and the Philippines. The problems that confronted the Asian countries in 1997 are almost exactly what are facing the West today. No one wanted to buy Asian government debt. Economic growth stopped. Unemployment rose.

As the dollar devalues over time, oil prices will rise. The Philippines must react by allowing the peso to appreciate to offset rising fuel costs. As the dollar depreciates, initially those Filipinos dependant on remittances will take a hit. However, over time, dollar devaluation will cause inflation to rise in the US. Even now the official numbers are inaccurate. Real inflation is running nearly 9 percent higher on a year-to-year basis in the US. As price inflation rises in the West, so, too, will wage inflation. At some point, there will be a washout in that remitted dollars will mean fewer pesos, but the amount of remitted dollars will rise significantly. We are already seeing this happening, with the dollar amount of remittances up 8.5 percent in January 2010.

Follow the peso and then look at the stock prices. Both will take a short rest where they are right now at their respective resistance levels. That will not last for long.

The peso is going up. The stock market is going up. Bank on it.

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