Angelo Taningco
Economist, Treasury Group
USD/PHP has breached 53 this morning (trading at around 53.10 as of this writing) after closing at 52.95 yesterday; this was the first time in 12 years that it went above 53. The peso has depreciated by 1% since the start of this month and 6% year-to-date. We now see stronger upside risks to our USD/PHP outlook, with our quarterly forecasts now revised up to touch 53.00 for end-Q2 and end-Q3, and to 52.75 for the end of this year. This has implications to our monetary policy outlook: though we maintain that one more rate hike this year is likely, and we have mentioned before that this could probably occur in the third quarter (Q3), we will not be surprised if such monetary policy adjustment will be made next week, in the upcoming meeting of the BSP’s Monetary Board on 21 June. We think an earlier-than-expected policy rate hike may be warranted especially if the rate of peso depreciation accelerates in upcoming days prior to the meeting date.
We think that the peso depreciation was due to a confluence of domestic and external factors. In the Philippines, rising inflation, balance-of-payment (BOP) deficits, and falling foreign reserves, we observed, were among the key determinants of the peso depreciation this year. Externally, risk-off sentiment in emerging markets (EMs), we believe, has also spurred the peso’s weakness. We witnessed EM currencies depreciating in light of domestic issues, such as political noise (ex. Brazil), double-digit inflation (ex. Argentina), and current account deficits (ex. Indonesia, Turkey). The increase in global oil prices, we also argue, has likely aggravated foreign investors’ concerns over rising inflation and current account deficits in many EMs, including the Philippines. Moreover, the US policy rate normalization has kept US rates on an upward path, and coupled with the strengthening of the US dollar has likely caused EMs to incur capital outflows, exerting currency depreciation pressures. No wonder several EMs like Argentina, Indonesia, and Turkey, have raised their policy rates more-than-expected in order to halt a further decline in the relative value of their local currencies, to better manage foreign exchange volatility; we think an additional monetary tightening may be warranted for the Philippines also in order to ensure price and financial stability.
Disclosures Appendix
This material is confidential and intended for suitable counterparties. The data and information provided in this report accurately reflect the personal views of the specialists or were obtained from public sources believed to be reliable. No representation or warranty as to its accuracy or completeness, express or implied is hereby made, and the investor should not rely thereon without making any independent analysis or research on any topic therein. Any opinion or advice expressed herein may change without notice.
This report is not to be taken as an offer to sell or buy securities or any investment. Security Bank Corporation denies any liability that may arise out of any loss or may result in actual, direct or consequential damage from the use or reliance on any material hereof. Reproduction of this material, whether in whole or in part, is strictly prohibited without the prior consent of Security Bank Corporation. Security Bank Corporation, its directors, officers or staff or any of its subsidiary or affiliates may have taken a short or long position in any investments or securities mentioned herein upon the presentation of this report and may buy or sell the investments or securities at any time in the open market or otherwise, either as broker, dealer, principal or agent. You hereby acknowledge that you have read and understood this Disclaimer and agree to be bound by the conditions therein.
