Should I convert my pesos to dollars?

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The peso-dollar exchange rate is inversely related to the stock market so that when the market falls, the peso depreciates

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Question:

I have extra funds coming from my SDA account that will soon terminate, and I am wondering if it is right to buy some US dollars as investment. The peso dollar exchange rate rose to as high as P44.80 to $1 two months ago and it has since stayed at the P43 level. Is this the best time to come in before the peso depreciates again? Please advise—e-mail by Lotis Magracia

If you plan to speculate on currency trading for short-term gains, this may be a good time for you to buy some US dollars as the peso may depreciate again with the stock market set to soon test the historical support at 6,100.

The peso-dollar exchange rate is inversely related to the stock market so that when the market falls, the peso depreciates.

About 68 percent of the time, the movement of the peso-dollar exchange rate is explained by the stock market.

It is highly correlated that you can almost predict where the peso will go based on stock market performance.

Over a year ago, I suggested in this column “Should I convert my dollars to stocks?” that it was wise to sell your dollars and use the proceeds to buy stocks instead, as the stock market at that time was rising on strong momentum while the value of the US dollar was falling.

Following the strong negative correlation between the stock market and the peso, historical figures will show that the value of the US dollar fell to the low end of the P40 range at the time when the stock market bull run was reaching uncharted territories. The market was so strong that the peso-dollar exchange rate could have been lower if not for the active support by our Bangko Sentral to keep it at above P40 to $1.

When the stock market was about to peak in May, the US dollar started to pick up as foreign investors were already selling at the top.

The massive selling of stocks that followed had caused the peso to depreciate as demand for US dollars increased with foreign funds repatriating their money back home.

The price of the US dollar has already fallen to the P43 level from a high of P44.80 since then as the stock market recovered in the last two months albeit on lower than average volume and lack of strong foreign buying.
With the current uncertainties in the market, it is possible that peso may depreciate again as the stock market is expected to fall further.

However, this may not be for long. Further peso depreciation may be limited.

Remember that there is the 32 percent of the time when other factors affect the peso-dollar exchange movement.
One factor is the expected surge in US dollars in the form of remittances, which can start coming in as early as November for the Christmas holidays.

Another source of dollars aside from portfolio investments are donations and financial aid from other countries.
If you plan to buy US dollars as long-term investment, you may want to consider the potential impact of the Quantitative Easing (QE) program in the US on the future value of the dollar.

The QE program was developed to stimulate the US economy by infusing new money supply into the system by buying nonperforming loans of banks and encouraging investors and consumers to spend and borrow at low interest rates.
While the QE program through increased liquidity has helped boost stock markets in the world to all-time highs, it also increased the risk of a US dollar devaluation.

When the US dollar devalues, the price of US dollar will fall.

How does this happen? Central banks used to print money using gold as collateral. This means that every dollar that is put into the system is supported by a tangible asset. Today, this system no longer exists. Central banks simply print money in the belief that they have enough assets to support the money supply.

The problem with the QE program is that the US Fed uses the loans bought from the banks as assets to support the creation of new money. These loans acting as assets are highly dependent on interest rates.

As more money is created and infused into the system, the higher the risk of inflation because it is assumed that when people have more money to spend against limited goods available, prices tend to increase.

When inflation becomes a serious threat, the US Fed will have to reduce money supply through higher interest rates.
If rates go up, the value of these loans in the form of bonds and securities, which are used to support the money supply, will shrink, making the US dollar lose its purchasing power.

While this may sound alarming, this scenario is still far from reality. In fact, latest economic data show that inflation remained low, meaning people are not spending too much despite the aggressive stimulus package of the US Fed.

Nevertheless, considering the potential risk of the QE program on the US dollar, it is very clear that the long-term upside potential of the price of US dollar in peso terms is very limited.

Therefore, you may consider investing your SDA funds into other investment assets such as stocks or properties. The complete phase out of SDA by Nov. 30 will release over P1 trillion into the system.

These funds being savings in nature may not necessarily translate into consumption, but may be channeled into the stock market and the property sector.

It will be good to take advantage of the current weakness in the market to position for strong recovery soon, hopefully before the year ends.

henryHenry Ong is a Registered Financial Planner of RFP Philippines. He is best selling book co-author of Money Matters. He also writes regularly as columnist for the Philippine Daily Inquirer.

Source: http://business.inquirer.net/152019/should-i-convert-my-pesos-to-dollars

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