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<nettime> Copycat Currency Trading Raises Market Questions

Copycat Currency Trading Raises Market Questions
October 7, 1999


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. 


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 bahtís 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 bahtís
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 bahtís
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 bahtís 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 pesoís 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. Estradaís 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 bahtís pattern at either
one of those events. Philippine newspapers have not missed the
discrepancy, quoting traders who admit their attention is focused on the

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. © 1998, 1999 Stratfor, Inc. All rights reserved. 

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