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.