[asia-apec 1322] <nettime> Copycat Currency Trading Raises Market Questions

[Roberto Verzola]

>Subject: <nettime> Copycat Currency Trading Raises Market Questions
>Date: Mon, 11 Oct 1999 08:57:10 +1000
>From: "nettime's roving reporter" <nettime-l at bbs.thing.net>
>Sender: owner-nettime-l at bbs.thing.net

http://www.stratfor.com/asia/specialreports/special91.htm

Copycat Currency Trading Raises Market Questions
October 7, 1999

Summary

Similar movements in the Philippine peso and Thai baht have led to
currency trading based on superficial, short-term similarities. Peso
trading has mirrored the baht, despite the rather obvious fact that
they are two separate countries with different economic policies and
considerations.  Recent fluctuations in the peso reflect the Thai
economy more than that of the Philippines, raising questions about the
stability of Asian financial markets.

Analysis

For the past three months, fluctuations in the Philippine peso have
reflected those of the Thai baht. This is not altogether unreasonable,
as the two nations have similar export-based economies, compete in the
same markets and are similarly affected by global events. However,
events in the past week show an overestimation of these similarities
by the financial community as it focuses on short-term patterns rather
than the domestic economies of each country.

>From July to mid-September, the Thai baht depreciated nearly 12
percent, going from around 37 to 41.5 baht to the dollar. The
Philippine peso likewise depreciated, dropping nearly 7 percent, from
about 38.3 to 41.2. The peso not only mirrored the baht’s general
trend, but also mirrored most of the bumps along the way. The baht
dipped in late July, peaked in mid-August, and hit another local peak
in early September. The peso did likewise, always just a day or two
behind. Astute observers caught this pattern and bought and sold the
currencies based on it. These transactions further increased the
synchronicity of the currencies.

Toward the end of September, the two currencies moved almost
simultaneously as the peso became increasingly responsive to the
baht’s fluctuations. Peso traders paid greater attention to influences
on the baht, rather than focusing on the peso and the Philippine
economy.

However, monetary conditions in the two countries were not the same.
The Thai government, no doubt still smarting over the effects of the
baht’s meltdown in 1997, was setting up light currency controls
prohibiting foreign investors from borrowing more than 50 million baht
unless backed by trade or investment activities in Thailand. No such
controls were planned by the Philippine government.

When these controls were imposed on Oct. 5, the baht abruptly reversed
its weeklong trend of appreciation and quickly depreciated, losing
about 2 percent of its value in two days. True to form, the peso made
a similar move and depreciated as well.

Here lies the rub. The baht’s shift was due to an internal monetary
policy decision by the Thai government, a decision that altered
borrowing patterns and purchases of the baht. The peso’s shift was due
in large part to currency traders focused on the baht and ignoring
economic signs in the Philippines. If the baht dropped, they figured
the peso should as well, even though it had no reason to do so. This
logic led to a peso that did not reflect Philippine economic
conditions.

One of the largest economic factors in the Philippines is a debate
over constitutional changes designed to attract foreign investment. We
see no evidence of that debate reflected in peso trading. Philippine
President Joseph Estrada has been advocating the amendment of a
constitutionally mandated limit on foreign investment in the
Philippines. Currently, foreigners are barred from owning land and may
only own up to 40 percent of certain businesses. Estrada’s proposal
would remove many of these restrictions. This is an extremely
emotional issue in the Philippines, dividing the country. The result
of this debate is of course critical for the future of the economy.

In the past week there were two developments in this debate: a legal
attack on the amendment process and a committee formed to expedite
that same process. The peso did not deviate from the baht’s pattern at
either one of those events. Philippine newspapers have not missed the
discrepancy, quoting traders who admit their attention is focused on
the baht.

This behavior is disturbing. While the Philippine and Thai economies
are admittedly similar, they are not integrated. Their currencies
should be traded due to the strengths and weaknesses of their domestic
economies, not due to short-term, self-fulfilling, unsustainable
trends. The short conclusion to draw from this behavior is that their
currency markets have not yet matured since their "recovery" from the
financial crisis. The longer conclusion is a bit more disturbing, and
questions the basis of that recovery.


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