June 28, 2013

Foreign Exchange Analysis

Data was retrieved from NSCB. Source: BSP

The graph shows how an investor will profit from foreign exchange of the Philippines. It was recorded that the strongest Peso was in the month of February 2008. You would notice that after the low point (point were Peso is strongest) the value of Peso begins to decline.

If I were the investor and I have seen the data above, I will anticipate that the strongest value of Peso is 40.67, given this information, I will sell the Peso I bought in August 2012 with value 42.04, once the strongest value is reached. For example:

I am a foreigner, I have USD 50,000. I bought Peso currency in August with a conversion of USD 1 = P 42.04.  That is:

                USD 50,000 * 42.04 = P 2,102,000 foreign investment in the Philippines

In February 2013, the value of Peso hit the strongest at 40.67, a signal to sell the Peso investment. Assuming that the Peso investment did not earn interest and the bank selling price is USD 1 = P41:

                P 2,102,000 / 41 = USD 51,268.29

This means that I earned USD 1,268.29. Not bad right? Yet, this is just an example. In reality we will be talking of millions.

Because many anticipated that the strongest point of Peso is 40.67 many would sell their dollars, as a result value of Peso will decline as shown in the table. By June 2013 average exchange rate is 42.8.

What does this article imply? The good thing about this article is that it teaches you to trade foreign currency. On the other side, this implies that our exchange rate is vulnerable against "hot money". In layman's definition, hot money is money from abroad that can be easily pulled out anytime by a foreign investor. Most of these investments do not create jobs; in negative way, it reduces our balance of payment. Like I mentioned in the example; the foreign investor parked his money in our country and when it already earned, he pulls it out.

The point of this article is the predictability of our exchange rate. Exchange rate should be stable not predictable. The change in exchange rate, January 2013 vs. June 2013, is 5%.

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