Philippine banks’ overbought foreign exchange (FX) amounted to $580.8 million in 2023, lower in terms of ratio to net open FX position in 2022, based on Bangko Sentral ng Pilipinas (BSP) data.

An overbought position is when a bank’s FX position leads to an extended upside price movement that is consistent and with no significant retreat. The oversold position is the opposite, or downward price movement. Basically, a bank’s net open FX position is the amount of net assets or liabilities denominated in foreign currency that it holds.

In a report, the BSP said it continues to closely monitors the banking system’s FX position.

At $580.8 million at the end of 2023, the central bank said this level is manageable with a ratio of the net open FX position to the regulatory capital of big banks at 1.3 percent. This was comfortably lower than the two percent as of end-2022.

“(It is) an indication of banks active management of their FX exposures,” said the BSP.

The net FX position to unimpaired capital ratio is a metric that provides valuable insights into how banks are exposed to FX fluctuations and their ability to withstand potential FX-related losses, explained the central bank.

Under BSP Circular No. 1120, issued in June last year, a bank’s consolidated net open FX position -- either overbought or oversold -- should not exceed 25 percent of qualifying capital or $150 million, whichever is lower.

At the end of 2023, the peso vis-à-vis the US dollar depreciated to an average P56.06 in the fourth quarter. It fell by 0.19 percent quarter-on-quarter.

On a year-to-date basis, the peso appreciated against the US dollar by 0.70 percent to close at P55.37 on Dec. 29, 2023 from P55.76 at the end of 2022, based on BSP data.

The BSP noted that the peso’s depreciation was due partly to broad US dollar strength driven by stronger-than-expected US economic data and hawkish signals from the US Federal Reserve which reinforced expectations that interest rates will remain elevated.

Meanwhile, the BSP considers the net FX position as manageable as it still shield banks from the adverse impact of a volatile FX market.

An open position is either positive or long and overbought which means foreign exchange assets exceed foreign exchange liabilities. Or it may be negative, short or oversold meaning foreign exchange liabilities exceed foreign exchange assets.

The BSP has always assured the market that it has the arsenal to prevent speculative peso-US dollar trading and that it also has enough buffer stock to defend the local currency from undue foreign exchange rate fluctuations.

To avoid “extreme” and substantial changes in the exchange rate, the BSP intervenes in the spot market to strengthen the peso by releasing US dollar liquidity. It withdraws from the country’s FX reserves or the gross international reserves to do this.

Exchange rate intervention and raising BSP policy rates are two primary monetary policy measures that BSP can do to stabilize the peso-US dollar rates.