Carlo's Think Pieces

Reflections of a Filipino in the Netherlands

Dollar will appreciate only till the end of March 2008

Posted by butalidnl on 12 March 2008

In the last couple of weeks, the dollar has appreciated in relation to the Philippine peso, climbing from about 40.4 in February to 41.40 today. Unfortunately for those Filipinos who are hoping for a stronger dollar, this is a temporary trend (which will end this month). Then, why is the exchange rate behaving so?

In order to understand changes in exchange rates, it is important to note that the real reason behind these changes is the movement of money into, or out of, various currencies. Thus, when a lot more dollars enter the Philippines, than leaves it, this would result in a rise in the peso. When it flows more the other way, the peso value will then go down (and the dollar will appreciate). Knowing this to be the main reason, it would be safe to ignore most of the analysis put forward by bankers, etc. on why the peso appreciated or depreciated in a given period.

Back to the specific situation this March. For many companies, their fiscal year ends in March. This is especially the case for Japanese companies, but many other companies also do this, since it is easier for them to attend to their year-end accounting and reporting at a time when sales etc. are not hectic (unlike in December). For foreign companies whose fiscal year ends this March, closing their books would also entail having to send home any profits which were not yet set during the course of the year. Since the peso had been appreciating most of the time against the dollar, many of these companies wisely decided to wait till the end of the fiscal year before sending home their profits. As a result, many of these companies are now remitting large amounts of money out of the Philippines this month.

For foreign investors in stocks or bonds (portfolio investors) whose fiscal year ends in March, they would be undertaking what is called “window dressing” of their investment portfolio. This means that their riskier or short-term investments would be sold off, and other more prestigious investments (mostly blue chip stocks in developed economies) would be bought. The purpose of this is to have a nice-looking annual report to their stockholders. As a result of these window dressing operations, many foreign portfolio investors in the Philippines will be selling off their Philippine stocks and bonds – resulting in another big amount of outward remittances.

These two factors, the remittance of profits and the window dressing operations, had resulted in the strengthening of the dollar vis-a-vis the peso last December. This was strange, since the peso usually strengthens in December as a result of inward remittances by Overseas Filipinos. We are now seeing Round 2 of this effect this March. The net effect this March (in terms of the dollar appreciation) may be more than what we saw last December, since the inward flow of money from Overseas Filipino remittances is less this time around.

Thus, we are likely to see the peso-dollar rate to reach 42:1 before the end of March. Since this is caused by very specific conditions this March, we will see a continuation of the trend towards peso appreciation starting in April. And this will likely reach 38:1 by November this year.

see also Peso-Dollar Rate

One Response to “Dollar will appreciate only till the end of March 2008”

  1. remitter said

    Thanks for a rather simplistic view on the entire matter. True the experts are now confusing than explaining the problem to the OFWs and other overseas workers who are dependent on the US economy to a large extent. On my blog http://remitter.wordpress.com/ I have been trying to understand this problem in an equally simplistic manner that helps the ordinary people to understand what to expect in the coming months. What do you recommend to the investors now? Do you think the hedge funds can solve the problem to some extent?

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