All about the Dollar

On the day after the elections, the Philippine stock market and currency rebounded from volatility-led lows, apparently because of the peaceful, orderly, and credible conduct by the COMELEC. It was extraordinary to see who the next president was going to be by the time the evening news programs came on Election Day itself. But beyond anecdotes, what do the data say about the drivers of the value of the peso and the market perception of Philippine-related risk?

The volatility in the PHP lasted for about three weeks, starting from the time that Mayor Duterte’s rape joke led the news (April 18), to Election Day itself (May 9). But extending the time period to more than one month, what drives the variability of the Philippine peso? If election-related jitters are too short-lived, what are the relatively long-lived factors that contribute to changes in the peso’s dollar value?

The international oil price can have an important impact on the currencies all over the world. Oil-importer India will see its currency depreciate with a high oil price; Malaysia will experience the reverse. It is interesting to point out, however, that both oil and the Philippine peso are valued in US dollars. A strong dollar should therefore make the oil price fall, all other things being equal. The same relationship should be observed regarding the peso.

The data for the past six years bear this out: a strong dollar correlates well with a weak oil price. However, given that global oil prices collapsed starting in mid-June 2014, it is important to examine any effect this regime change had in the relationship. Looking only at data from June 2014 up to May 2016, the correlation holds, with R² increasing to 0.65 from 0.58.

However, the relationship between the sovereign Philippine 5-year CDS, which is denominated in US dollars, is inverted. The CDS price has a negative relationship with Brent crude for the past two years (and none for the past six years). Oil is becoming more correlated with Philippine credit, as R² increases from nothing to about 0.46. This means that as the dollar strengthens, oil price falls, and so does the peso and the Philippines’ creditworthiness.

It is, in short, all about the dollar. 

NOTE: Peso values are presented as the inverse of USDPHP. Example: if the exchange rate is 46, the value used is (1/46)*1000 = 21.7391.