Banks based in the Philippines are understood to have agreed informally to cap their non-deliverable forward (NDF) positions, according to Nomura FX strategists. The initiative became live on March 4.
Reasons for this move, which could not be immediately corroborated, may be linked with the Bangko Sentral Ng Pilipinas (BSP) desire to contain the selling of US dollar for pesos onshore, placing upward pressure on the country’s currency.
The move may also have something to do with BSP’s concern over the large FX arbitrage positions onshore banks have. Arbitrage occurs because banks can take a positive carry from selling onshore forward and buying offshore US$/PHP NDFs that are deliverable in US dollars.
Nomura said the informal agreement amongst onshore banks has already led to some unwinding of arbitrage positions.
This unwinding has caused the onshore/offshore spreads to widen, with the spread difference between the 12-month forward rate and the NDF rate gapping out to -470 basis points compared with -80 basis points on March 4, when this informal agreement is believed to have started.
As spreads widen out, arbitrage opportunities naturally become more compelling, leading to arbitrage activity picking us with banks’ net open positions that do not hit this March 4 level.
“It could also add to NDF volatility because of less arbitrage activity, which would under normal circumstances keep the onshore and offshore curves closer together,” wrote Simon Flint, head of FX strategy at Nomura.