Philippine peso may fall vs rupiah on oil surge
Philippine peso may fall vs rupiah on oil surge
Benjamin Pedley and Sharon Lim, Dow Jones, Singapore
A rise in crude oil prices to their highest in 13 and a half years is a boon for some economies in Southeast Asia and a bane for others, creating trading opportunities in an obscure currency cross.
Few, if any, analysts watch how the Philippine peso and the Indonesian rupiah trade against each other on a daily basis, but charts show that the peso often falls against the rupiah when oil prices are rising, and vice versa.
That makes sense as the Philippines imports almost 100% of its crude oil requirements, while Indonesia is the only Asian member of the Organization of Petroleum Exporting Countries, and one of two net oil exporting nations in the region.
High energy prices benefit Indonesia as increased oil royalties strengthen the government's fiscal position. For the Philippines, however, they are a brake on economic growth, increasing productions costs, particularly with the peso hovering near all-time lows against the dollar.
Around 0640 GMT (1.40 p.m Jakarta time) Wednesday the peso is at 156.64 rupiah.
With many analysts expecting oil prices to rise further on such factors as security concerns in Saudi Arabia and the prolonged military conflict in Iraq - expectations that are backed up by technical analysis - investors should consider establishing short peso-rupiah positions on any rallies in the cross.
On the other hand, investors would have to be nimble about squaring those shorts and going long the peso against the rupiah if crude prices should later be pressured by economic fundamentals - such as the growth-damping effects of expected higher global interest rates, particularly in the U.S.
Other triggers for crude price falls - and a coincident peso- rupiah rally - would include increased oil supply.
That has been a topic in recent weeks since Washington Post reporter Bob Woodward published a book saying the Saudi ambassador to the U.S., Prince Bandar bin Sultan, promised President George W. Bush that the kingdom would keep oil prices low ahead of before the U.S. election. Saudi Arabia denies claims it has an agreement with the White House to increase oil production - driving down gasoline prices - ahead of the Nov. 2 poll.
The inverse relationship between oil prices and the peso- rupiah cross has been evident several times in the past four years.
After the Sept. 11, 2001, attacks, the lead crude contract on the New York Mercantile Exchange sank to around US$17 a barrel from $30. During the same period, the peso rose to Rp 211 from Rp 162.50. Similarly pronounced correlations were also evident on the weekly chart in the first and fourth quarters of 2002 and the first half of 2003.
Last September as Nymex crude futures rose to almost $39 from $27 and the peso was tumbling to a record low against the dollar, it also sank below Rp 150.
The peso has since recovered a little on expectations Gloria Arroyo will be returned to office as the Philippine president in May 10 elections. She is seen as more market-friendly than movie star Fernando Poe Jr., a movie star who previously was leading in the opinion polls. But any postelection gains on an Arroyo win are likely to be short-lived as economic and fiscal problems - exacerbated by high oil prices - will remain after any market euphoria subsides.
This means that if oil prices remain high and the peso rallies toward Rp 160 underlying resistance in the wake of an Arroyo victory, investors should sell the cross. Above there, major underlying resistance formed by an August 2001 low comes in at 162.17 pesos - though this level looks well beyond reach for now.
Conversely, any break under the December low at Rp 148.50 should open the way to deeper losses.
Presidential polls are also due in July in Indonesia, but for near-term trading purposes these can be put to one side for now.