The US Dollar – Philippine Peso exchange rate has been going down dramatically over the past year.
I remember the price to be somewhere around P45 last year and just recently, it has breached the P40 mark.
For OFWs, exporters, bloggers, virtual assistants and many others who earn in U.S. dollars – this is bad news.
While Philippine peso earners, ironically, couldn’t help but ask why they’re not feeling the supposedly good effects of the strengthening local currency such as the lowering of basic commodity prices.
In my opinion, the only people who have actually been enjoying the past few months are the investors. Ask anyone who has UITF, mutual fund and stock market investments and they’ll show you double digit increases in their portfolio’s value.
Anyway, a lot has been asking me this question and I know many OFW’s and other dollar earners are currently concerned with what they need to do to protect their finances during these times. So please allow me to give my two cents on this topic.
First, you should understand that the exchange rate has been going down not only because the Philippine economy is good, but also because the U.S. economy is finding it hard to fully recover from their recent recession.
At current, their biggest hurdle is the U.S. Fiscal Cliff and many analysts are saying that it could take some time before America can come up with a clear plan on how to overcome this obstacle.
In short, expect the USD/PHP rate to continue to go down unless our own Banko Sentral ng Pilipinas (BSP) intervenes by weakening the Philippine peso to move the rate up or at the very least, stabilize it.
However, he says that the price could also retrace and go up sometime mid-2013. Personal technical analysis shows that the target price for the USD/PHP climb is P43, but note that nothing is ever sure and this is just a calculated guess.
So the big question now is…
What should you do with your dollars?
But first… for pure peso earners:
Please save and invest! You’re missing a lot of potential earnings by “staying on the sidelines”. Take out those excess time deposits and put them somewhere with a little bit more risk.
Now… for dollar earners and those who earn in both pesos and dollars:
Stay tough and be strong. A good plan is to:
- Convert just enough USD to PHP to last you until mid-2013. Keep the rest of your USD as is. Then see the plan for dollar savers below.
- For dual currency earners, make the most out of your PHP to avoid using your USD – but if you must, convert only the amount you’ll need to survive until mid-2013. Then also see the plan for dollar savers below.
For those with dollar savings
You have two options to protect the value of your money:
- Invest your USD. Do cost averaging on dollar-based UITF’s and mutual funds which are available in most banks and investment companies.
- Hedge your dollars to keep its value. This means:
- Convert exactly half of your USD to PHP. Ideally, you should keep the PHP in a bank account separate from your usual savings that you use for your living expenses so you can avoid touching it.
- This means if you have $10,000 – then convert $5,000 to PHP. You can do this one-time or slowly in small amounts. Since we expect the USD/PHP rate to fall further, it’s better in my opinion, to do it in one go.
- By hedging, you are technically, keeping the current value of your money. When the value of the USD falls, the value of PHP rises (and vice versa). Since you have both currencies, then the total value of your money will remain the same (in theory).
How Hedging Works
Let’s say you have $10,000. If USD/PHP = P40 and you convert half of that to PHP, then you’ll end up with $5,000 and P200,000. Take note of these two amounts and ready a calculator.
If USD weakens or PHP strengthens
When USD/PHP becomes P39, and you convert your P200,000.00 to USD, then you’ll have $5,128.21 (P200,000 / P39). Moreover, if you convert your $5,000 to PHP, then you’ll have P195,000 ($5,000 x P39).
Now convert the $128.21 back to PHP and that will become P5,000 ($128.21 x P39). So theoretically, you still end up with $5,000 ($5,128.21 less $128.21) and P200,000 (P195,000 plus P5,000) – the same amounts you had at the beginning.
If USD strengthens or PHP weakens
Now when USD/PHP becomes P41, and you convert your P200,000.00 to USD, then you’ll have $4,878.05 (P200,000 / P41). Moreover, if you convert your $5,000 to PHP, then you’ll have P205,000 ($5,000 x P41).
Now convert the P5,000 back to USD and that will become $121.95 (P5,000 / P41). Again, you end up with $5,000 ($4,878.05 plus $121.95) and P200,000 (P205,000 less P5,000).
Nosebleed? Try to get a piece of paper and write notes as you read that again.
If you still don’t get it after several tries, then don’t sweat it. Because all you really need to do is: divide your money equally in half and keep them in both currencies.
- If you decide to hedge your dollars, you don’t need to convert anything when price changes. Just keep both parts in the currency it’s in and ride the market. The conversion activities above is just to show you why your money will not lose its current value if you hedge it.
- When converting your USD to PHP (and vice versa), you’re actually losing money from the spread (the difference between the selling price and the buying price). So do this with caution and as less frequent as possible.
- Hedging will keep the value of your money, it will neither increase nor decrease it. Hedging is not a way to make your money grow. It’s just a way to protect its value from market price changes.
- Once you divide your dollars to hedge it, it’s still a good idea to invest your money (both the USD and PHP) in low-risk funds. If you have a long investment horizon and higher risk tolerance, then consider moderate-risk instruments.
Everything’s too complicated for me, is there a simpler solution?
Yes! Just forget about hedging and simply convert enough USD to PHP to last you until mid-2013. Then invest the rest of your USD in low-risk dollar-denominated funds.
When USD/PHP reaches P43, then consider converting more USD to PHP to last you for the rest of 2013. And if you have excess PHP, then consider investing that in UITF’s, mutual funds and/or the stock market.
One final advise:
Instead of worrying too much about the falling value of the U.S. Dollar against the Philippine Peso, I suggest that you instead focus more time in controlling and bringing down your expenses, creating additional sources of income and looking for business and investment opportunities.
That is the best thing you can do – and you can start learning how to do all that by subscribing to Ready To Be Rich today.
Disclaimer: I am not a finance professional and the information, market predictions and money tips given above should not be considered as expert advise. Read my full disclaimer here.