How markets judged Rishi and Xi; Manila's dollar migraine

Dollar Dilemma: Postcard From Manila

Dollar strength has effects everywhere. Points of Return's Isabelle Lee spent last week in her native Philippines; here's a Postcard from Manila:

The strength of the US dollar is spilling over in all corners of the world. In Japan, the decline of the yen to 25-year lows certainly looks like it's forced the authorities to intervene to keep the currency from falling beyond 149 per dollar, although they have still not told other banks that they've done so. This is how the yen traded on Friday and Monday:

In Asia, the problems spread well beyond Japan. In the Philippines, home to more than 110 million people, the stress has been even more pronounced. Traditionally, a 1,000-peso note (the highest denomination) is held to be enough to do your week's grocery shopping. Now, it isn't, and people don't like it. Almost literally, the peso is underwater:

In currency markets, the peso has fallen against the dollar in 20 weeks since the beginning of August, one of the longest such stretches in history. It slumped to a record low of 59 in late September and has hovered around that level ever since. The peso closed lower by 0.2% against the dollar on Monday, still close to breaching the 60-peso level for the first time. Before the Asian crisis of 1997 broke through currency pegs across the region, it used to trade at 26. Going back into history, my parents can remember when the peso traded at 2 per dollar, and when there was even such a thing as a one-peso note; now the 20-peso note is about to go out of circulation to be replaced by a coin. This is how the peso has moved since it was allowed to float against the dollar in 1993:

This drop has prompted the nation's central bank governor, Felipe Medalla, to intervene to support the peso, saying the depreciation has been exacerbating inflationary pressures. He declined to provide specifics about how the bank would intervene, but alluded to more tightening to shore up the currency.

"There's a threshold where it becomes very political, so it's good to act before it becomes too political," Medalla said on the sidelines of a forum in Manila on Monday. If the Federal Reserve increases by another 75 basis points at its next meeting — widely anticipated for the fourth straight time — the Philippine central bank (or Bangko Sentral ng Pilipinas) may have to match it, Medalla said, citing a narrowing rate differential with the US as a factor for the peso's slump.

But there is broad political concern across the country. Even new President Ferdinand Marcos Jr. has said the nation is prepared to defend the currency.

Finance Secretary Benjamin Diokno told Bloomberg in an exclusive interview that the government is trying to prevent the exchange rate from "breaching 60" pesos to the dollar. Until now, the line has held at 59. The intervention has been obvious:

Worldwide, central banks have been struggling to find ways to deal with their weakening currencies against the greenback. As Bloomberg's Karl Lester Yap wrote, they are diverging, "with the Philippines now joining China and Japan in appearing to defend a particular level" while most others are merely trying to limit volatility.

That the dollar-peso is trading at record highs, paired with rising domestic inflation and a more hawkish Fed, is why Shreya Sodhani of Barclays expects the BSP to hike its overnight borrowing rate by 75 basis points to 5.0% at its November meeting (which would still be low by the standards of emerging markets), raising her forecast from just 50 basis points. The revision, she said, reflects Governor Medalla's comment on Oct. 14, suggesting a 50 or a 75 basis-point hike to "manage spillovers from other countries," which could impact inflation expectations. 

Where will the peso go from here? Well, in the runup to New Year's Eve, Diokno in Bloomberg's exclusive said the nation expects $15.8 billion in inflows from overseas Filipinos' remittances and call-center receipts this year, and can use $10 billion of that to defend the peso. Hopefully by then, he said, the currency will eventually strengthen to 55, "where we want it to be," despite doubts from some strategists. 

With peso weakness adding to price pressures, the average Filipino is feeling the pinch of surging prices for goods and services. Inflation is at 6.9% (again, not severe compared to many other countries), but increasing fast and risks rising to a 13-year high.

In conversations with friends and family, most experience it in food and gas, both of which are likely to see prices accelerate. Many have quipped how 1,000 pesos (roughly $17 at current exchange rates) doesn't get them very far anymore. And looking at this list of basic necessities and prime commodities from the trade and industry department as of August, price increases ranged between roughly 3% and 10%. Local media reported that the price of coffee refills rose between 5.81% and 9%, while bottled water prices rose between 3.53% and 10% (tap water is generally not advisable to drink). These basics make a big difference.

The Philippine peso may be underwater for now, but global economies are interlinked. Instances like these (fortunately or not) remind us just how connected we all are.  

Xi What You've Done

Elsewhere in Asia, there's been a dramatic response to events in China over the weekend, which saw President Xi Jinping cement himself into power for another five years with a politburo composed only of his supporters, while his predecessor, Hu Jintao, was removed from the climactic scene of the party's congress.  

International investors did not like this one little bit. Hong Kong's Hang Seng index suffered its worst day since the crisis month of October 2008:

As for Chinese stocks quoted in the US, the Nasdaq Golden Dragon China index had its worst day in history. Amazingly, it is now no higher than it was in December 2006:

All of this had happened at a point when investment flows out of China were already the greatest since the Global Financial Crisis of 2008, as shown here by the Institute of International Finance. The IIF's Robin Brooks suggests that the outflows could now become a torrent, and it's hard to disagree:

It all adds up to a market rebuke to a politician almost as brutal as the humbling handed out to the hapless Liz Truss. China has a greater ability to ignore the international markets than does the UK; but Xi is likely to find that negativity on such a scale will hamper him. More on this anon. 

Festival of Light

On Diwali, Hindus' festival of light, British Conservatives decided that Rishi Sunak should become their leader, and hence the UK's first-ever Hindu prime minister. He's also the first non-Christian prime minister (Benjamin Disraeli, born Jewish, had been baptized by the time he ascended to the top office), and the first person of color in the job. It's undeniably significant for the country that he has reached the top post.

It's also true, however, that he is the first former Goldman Sachs employee and hedge fund manager to climb to the top of Britain's greasy pole of politics, and he's probably the richest man ever to get there. To his own wealth must be added the fortune of his wife, who is an heir to the huge Indian company Infosys. In another first, he has an MBA from Stanford. And when it comes to the British obsession with education and status, he is the fifth Oxford graduate in a row to take the job, and also an alumnus of Winchester College, one of Britain's most prestigious public schools, where he was head boy. 

Despite all the "firsts" connected to his ascension, then, he is very much a creature of the traditional British establishment and also — more importantly at present — of the global financial establishment. That matters, because his job for the next two years before the election is to find a path for the economy that can pass muster both with the UK's population and with international capital markets. 

Those markets were kind during his first day as leader, but Sunak has a big task ahead of him. Ten-year gilt yields are now equal to their lowest point since Kwasi Kwarteng's "mini-budget" of Sept. 23 sent gilt markets into meltdown. They are still, however, some 50 basis points higher than they were at the beginning of mini-budget week, which started with Queen Elizabeth II's funeral:

His victory owed much to Conservative MPs' grasp that whoever they picked as leader would have to prioritize the economy and stability over all else. Theresa May promised "strong and stable" leadership; Sunak has to provide it. So far, it looks as though the party grasps that it cannot afford any more feuding, and that it looks ridiculous. That means the chances of relatively dull and undramatic technocratic governance for the next two years look strong. That may not be what a majority of Britons voted for, but it will certainly sound good to the markets. 

Sunak officially takes over Tuesday. In Italy, Giorgia Meloni started as prime minister at the weekend, becoming the country's first female premier, and its first hard-right leader since the fall of Mussolini, in the process. Comparing the bond markets' welcomes for these two trail-blazing but very different premiers is fascinating. Both Italian BTPs and British gilts trade at a higher yield than German bunds, to reflect higher risk. But the pattern in spreads over bunds this year has been very different:

Italy has serious problems and doesn't have control of its own monetary policy. Britain also has dreadful problems, but was seen as a safer bet. Being outside the EU, and particularly the eurozone, does have its advantages. During the crisis of the last month, Britain was seen as almost exactly as risky as Italy. Now, the spread over bunds is approaching its levels from the beginning of the year. Given Germany's very direct exposure to the war in Ukraine, that's still quite a damning judgment on perceptions of the UK, but it's moving in the right direction. 

Meanwhile, some sense of stability and certainty does seem to help; spreads for both countries have dipped over the last week. More on this also, doubtless, anon. 

Survival Tips

First, my apologies for the technical difficulties that thwarted us from publishing yesterday. That meant I didn't get to gloat over the ignominious end to Boris Johnson's vainglorious attempt to get his old job back. Conservative MPs may be insane, on recent evidence, but they're not stupid; bringing him back, within months of being fired for being a dishonest liar, was never going to work. Someone with some self-awareness might have grasped that. Johnson, who seems to have even less self-awareness than Liz Truss, did not. This piece, a beautiful fugue in the classical style, written and premiered at Balliol College, his alma mater, now works as a good epitaph. I really recommend listening to it. Alternatively, this Lily Allen song catches the right balance. 

As for songs to serenade Sunak as he takes on his poisoned chalice, try Stuck in the Middle With You by Stealers Wheel, featuring a young Gerry "Baker Street" Rafferty. ("Clowns to the left of me, Jokers to the right, here I am.") And he can always take solace in the fact that starting where he is, The Only Way Is Up (Yazz and the Plastic Population) and Things Can Only Get Better (Tony Blair's old anthem by D: Ream, which with any luck is truer now than it was when New Labour won in 1997). Or he could listen to a completely different song called Things Can Only Get Better by Howard Jones, or Getting Better by the Beatles — while for the Conservatives, and for the nation, it's Back to Life, Back to Reality (Soul II Soul). With luck, The Dog Days Are Over (Florence + the Machine), and if they aren't, Rishi can always remind us that it's not the same As It Was (Harry Styles covered by Arcade Fire). Any more suggestions out there?

John Authers is a senior editor for markets and Bloomberg Opinion columnist. A former chief markets commentator and editor of the Lex column at the Financial Times, he is author of "The Fearful Rise of Markets." 

Disclaimer: This article first appeared on Bloomberg, and is published by special syndication arrangement.