WHILE the Philippines continued to celebrate the New Year last Friday, the rest of the world went back to business. We may have seen the financial and asset markets set the tone for 2015.
The Dow Jones Industrial Average Index (DJIA) of the New York Stock Exchange ended the session slightly up, gaining about 10 points. However, as in any game, the final score may not be as important as how the game progressed. The DJIA started last Friday gaining over 100 points, then it went down 200 points. Leaving 2014 behind did not mean that the stock markets left behind the trading volatility that we have seen over the last couple of months.
Brent crude oil was subjected to further selling, as the price continued its fall after breaking a key level—$57 a barrel. The closing price on the first day of trading in 2015 was $56.42, a 1.42-percent drop from the previous close.
However big that story is, a bigger one is found in the currency market.
The US Dollar Index (USDX) is a measure of the value of the American dollar relative to a basket of foreign currencies. The weighting is 57 percent to the euro; 14 percent to the Japanese yen; 12 percent to the British pound; and the balance against the Canadian dollar, Swiss franc and Swedish krona.
The USDX closed at 91.47, the highest since November 2005. We may be seeing the beginning of an upside reversal in a downtrend that started in 2000.
The Japanese economy is a disaster area with little chance of recovering. The country has reached a point where it is mathematically impossible for it to pay its government debt. The European Union is facing uncertainty, with the German economy weakening because of the economic sanctions imposed on Russia.
The key to the Philippine economy in 2015 will be the peso.
Bangko Sentral ng Pilipinas (BSP) Governor Amando M. Tetangco Jr. and his team have done an impressive job in the last few years managing the peso exchange rate, but the real test will come in 2015.
Tetangco’s greatest strength is his understanding that using the immense power of the central bank is like riding a tiger. So far, the BSP has ridden the tiger well. The BSP also recognizes the need to let market forces have the strongest voice in determining the exchange rate.
However, a too-weak peso would make us lose the advantage we got from lower oil prices. It may be difficult to keep the peso steady this year against the very strong US dollar.
We must watch the peso, as it will forecast both the movement of our economy and stock market.