Peso appreciation to slow in the near term ahead of BSP easing

THE PESO is seen to strengthen at a slower pace over the near term as market optimism on cooling US-China trade tensions fades and ahead of further monetary easing by the local central bank, Fitch Solutions said.

In a report sent to media on Monday, Fitch Solutions projects the local currency to average P52.10 against the dollar this year, as “the boost from dollar weakness and hopes of a cooling of trade tensions fade.”

The peso was recently at its strongest level since February 2018 on market optimism ahead of the meeting of US President Donald J. Trump and Chinese President Xi Jinping on the sidelines of G20 summit in Osaka, Japan.

Over the weekend, both leaders agreed to resume trade talks after weeks of hurling tariffs against each other imports. Washington said it will cancel a planned 25% tariff on $300 billion worth of Chinese imports and will ease restrictions on American companies to sell to Chinese telecom giant Huawei Technologies Co. Ltd.

“[W]ith the potential for more positive trade dynamics already priced into the peso via the recent appreciation, we believe markets will need an upside surprise boost for the peso to break-through the resistance level PHP51.00/USD,” Fitch Solutions said in the report published on Friday.

The research unit of the Fitch Group added that the local currency will likely appreciate less in the near term — or within three to six months — as the Bangko Sentral ng Pilipinas (BSP) is seen to begin easing monetary policy more aggressively.

“[W]e believe slowing Philippine economic growth, limited fiscal stimulus and the dovish shift by DM (developed market) central banks will create a window of opportunity for the BSP to cut further, from 4.50% to 4.25% by end-2019, alongside other easing measures,” the research group said.

The central bank kept interest rates untouched during its June 20 meeting on expectations of steady inflation and economic growth. The BSP said this “prudent pause” — coming from a 25-basis-point (bp) reduction in rates during its May 9 meeting — allows them to observe and assess the impact of prior monetary adjustments such as the phased cut in reserve requirement ratio (RRR) of banks.

Over the long term or in six to 24 months, Fitch Solutions said the peso’s risk-on period will “run its course” as slowing global growth raises investors’ optimism for the US Federal Reserve to cut interest rates.

“This in turn will result in recurring bouts of risk-off sentiment as growth slows despite monetary easing, with a potential for a more protracted period of risk aversion were growth to slow more aggressively,” it said.

Fitch Solutions added supporting factors for the peso include moderate inflationary pressures, the country’s net external creditor position as well as strong reserves and foreign direct investment inflows.

However, risks on the country’s current twin deficit as well as pro-growth tendencies of the government and the BSP “could contribute to investor concerns and add to depreciatory pressures.”

Sought for comment, BSP Deputy Governor Diwa C. Guinigundo described the policy rate cut of the BSP last May as “moderate” as it only slashed rates by 25 bps.

“There was also a 200-bp reduction in RRR…. This is basically intended to address the temporary issue of tightness in liquidity,” Mr. Guinigundo told reporters on the sidelines of Pre-State of the Nation Address Economic and Infrastructure Forum yesterday.

“Will the appreciation of the peso stop or moderate over the next weeks or months? I’m not sure if it that’s the way to look at it because you have a very strong macroeconomic fundamentals…” he added.

“That strong macroeconomic fundamentals actually provide a support to a stable Philippine peso.”

He also noted that the pricing behavior of investors on positive developments in US-China trade relations is a “business decision on their part” since uncertainty on the issue continues to linger.

“Over time, you don’t know actually the direction of the policy you should be pursuing, especially at this time where there’s so much uncertainty on this particular issue.” — Karl Angelo N. Vidal