Peso seen to strengthen this year on easing inflation expectations

THE PESO is seen to strengthen against the dollar this year propelled by declining crude prices and decelerating domestic inflation, a foreign exchange research firm said.
In a press conference Thursday, Alpari Research & Analysis Ltd. Head Analyst Tomasz Wisniewski said 2019 will be a better year for the local currency after headline inflation in the country peaked in 2018.
Mr. Wisniewski predicted that the peso could strengthen to as high as P49 versus the greenback this year once it breaks the support level at P52 to the dollar.
“It seems like the worst is over and 2019 is the time for the Philippine peso to shine,” Wisniewski told reporters yesterday. “If we assume that the inflation pressure is over, we may begin to see further strength in the peso.”
Inflation slowed further to 5.1% in December from a nine-year peak of 6.7% in October as oil prices declined and food supply normalized. For 2018, headline inflation averaged 5.2% — faster than the central bank’s 2-4% target band and the highest since 2008’s 8.2%.
The Bangko Sentral ng Pilipinas (BSP) expects headline inflation to return to below four percent by around the end of the first quarter this year.
Mr. Wisniewski added that lower oil prices will also drive the peso’s strength this year, as he found strong correlation between the movements of crude prices and the peso-dollar exchange rate.
“The new year has brought a reversal in oil prices, but this is likely a… normal correction. In my opinion, WTI (West Texas Intermediate) [crude oil price] should not climb higher than $60 per barrel,” he said.
“If crude oil prices remain at this range, the peso would be able to benefit.”
Another tailwind for the peso this year is the rise in interest rates in the country, supported by the multiple tightening moves by the central bank in 2018.
The BSP raised its benchmark interest rates by a cumulative 175 basis points last year to rein in inflation as well as price expectations.
“For the peso, we got a combination of three important factors: lower price of oil, lower inflation and higher interest rates. Those three factors together increases the demand for the peso,” the analyst said.
As the peso is expected to strengthen this year, Alpari said it has a dovish view on the dollar, as expectations for the US Federal Reserve to tighten its policy rates in 2019 dwindled.
“We thought last year that this year, we’re going to have three to four rises in Federal fund rates, which supported the American dollar. But now, concerns are only about two rises in the United States in 2019, which negatively affected the dollar,” the analyst said.
“So the appetite for the dollar is not so big, and we’re dovish about the dollar. We see the dollar decline in 2019.”
The peso closed yesterday’s session at P52.86 versus the dollar, down 11 centavos from Wednesday’s finish of P52.75. — Karl Angelo N. Vidal