MONEY MARKETS-Philippine swap rates slide on surprise

* Peso IRS drop driven by dollar squeeze, FX forwards

* suspected of stopping FX forward book roll-over

* Traders seen cutting more long peso positions

* BSP move seen as test case, to resume forward positions

By Saikat Chatterjee

HONG KONG, Nov 9 (BestGrowthStock) – Philippine short-dated swap
rates struck record lows on Tuesday, with the central bank’s
sudden move to absorb dollars causing an interbank funding
squeeze that has rippled across currency and interest rate

A dollar funding crunch has worsened since the country’s
central bank stopped supplying dollars through its $22 billion
forward book that is used to sterilise FX intervention, traders

The funding shortage has prompted market players betting on
a stronger peso to shift positions into the forwards market,
sparking the move that has then spilled into the swaps market
because the floating rates in the contracts are determined by
currency forwards.

The peso has dropped and swap rates have plunged, with
traders believe the BSP was trying to squeeze in the market as
a way of warding off potential inflows after the Federal
Reserve’s latest round of quantitative easing.

Traders also said there was talk that the central bank, the
BSP, could take action to limit onshore trade in
non-deliverable forwards (PHPNDFOR=: ) as a means of limiting
inflows and speculation in the peso.

Analysts were surprised and considered it a policy move by
the central bank.

FX strategists at Standard Chartered took profits on their
long peso call and said market players may cut more long FX
positions on the “apparent policy change.”

Asian countries are grappling with a wave of money heading
to the fast-growing region and have taken isolated measures to
limit the impact of the expected wave of inflows, with U.S.
interest rates set to stay near zero for many months.

Last month Manila relaxed outward investment rules in
October to encourage outflows, while South Korea has started
inspecting foreign bank trading books and has warned of taking
new measures in to limit trade in currency forwards. Thailand
reimposed a withholding tax on offshore purchases of local
bonds. See [ID:nSGE69503F]

“This move from the authorities demonstrate that they are
getting concerned about heavy inflows and we may see them
taking more steps if this doesn’t have the desired effect,”
said an interest rate trader at a Manila-based bank.

Several analysts said the BSP had stopped rolling over its
forward book. By doing so, the central bank exacerbated a
dollar shortage as market players have built up hefty short
positions in dollar/peso, especially in the past month.

Local banks have scrambled to buy dollars in the cash
market to meet funding commitment, while foreign investors have
shifted dollar/peso short positions into the forwards market,
traders said.

The washout of positions forced the peso to give back some
of its recent gains and dimmed the relative allure of peso

One-month forwards (PHPF=: ) plunged nearly 200 points while
spot peso (PHP=: ) weakened by about 1.5 percent since last week.

The downward pressure on the forwards spilled into the IRS

One-year swap rates (PHPIRS: ) were down 10 basis points on
the day and have dropped 135 basis points (bps) in the past
week to 2.05 percent — way below the central bank’s 4 percent
policy rate.

Government bonds have been caught in the move as well.
Two-year bond yields fell 10 basis points and are down 35 basis
points (bps) in the past week. The severity of the move means
two-year swap rates are a full 230 bps below bond yields.

Short-dated bond yields (#PHBMK: ) have also dropped since
data last week showed inflation slowing to a one-year low,
stirring doubts about when the BSP would start lifting rates.

The latest move may also have been a “test case” by
authorities for dealing with any sudden surge of inflows, said
Citigroup analyst Jun Trinidad said in a note.

But Trinidad also said that the BSP was unlikely to stay
out of the forwards market for long because that would result
in releasing about 400 billion pesos ($9.3 billion) into the
interbank market in the next few months.

Traders said the BSP action is likely a one-off, and
foreign investors are unlikely to be deterred from building
long peso positions on an upbeat economic outlook.

“Despite BSP’s unorthodox move, we believe the weak U.S.
dollar trend, likely to be reflected by the peso, remains
intact for now,” Trinidad said.

MONEY MARKETS-Philippine swap rates slide on surprise