Peso may depreciate further on US recession fears due to hawkish Fed
THE PESO may continue to depreciate against the dollar this week on fears of a recession in the United States after the US Federal Reserve chief said they are committed to bringing inflation within target.
The local unit closed at P54.985 on Friday, weakening by 28.5 centavos from its P54.70 finish on Thursday, data from the Bankers Association of the Philippines showed. This was the peso’s weakest finish in over 16 years or since it closed at P55.08 on Oct. 27, 2005.
The peso also sank by P1.235 from its P53.75-per-dollar close a week ago.
UnionBank of the Philippines, Inc. Chief Economist Ruben Carlo O. Asuncion attributed the peso’s decline to the Bangko Sentral ng Pilipinas’ (BSP) dovish stance despite the expectations of more aggressive rate hikes from the Fed in the coming months.
The Fed’s hawkishness caused the peso to sink further on Friday, Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort said.
A week after hiking rates by 75 basis points (bps), which was the biggest increase since 1994, Fed Chair Jerome H. Powell told a US Congress hearing on Thursday that the US central bank is committed to bringing down inflation despite risks of a downturn, but said it is not trying to engineer a recession. Markets are pricing in another 75-bp hike at the Fed’s July meeting as several Fed officials have said they would support more aggressive hikes as inflation remains high.
Even with the Fed being increasingly hawkish, the BSP last week raised benchmark interest rates by just 25 bps for a second straight meeting to cool rising prices and continued to signal gradual normalization, even as it said it is prepared “to take all necessary policy action” to bring inflation within its target over the medium term.
The BSP raised its average inflation forecast for this year to 5% from 4.6% previously, well above its 2-4% target. For 2023, the BSP now sees inflation averaging 4.2% from 3.9% previously and then slow to 3.3%, back within target, in 2024
Inflation rose to 5.4% in May, the highest in three and a half years, amid the continued rise in food and fuel prices.
For this week, Mr. Asuncion said the peso may continue to weaken versus the greenback along with other emerging market currencies due to the risk of a US recession amid the Fed’s aggressive tightening.
He added that expectations of gradual rate increases from the BSP would give little support for the peso as the dollar will be more attractive.
“The situation in the financial markets would remain similar for as long as the Russia-Ukraine conflict drags on, in terms of relatively elevated global commodity prices and inflation,” Mr. Ricafort added.
He said the peso’s recent decline also makes up for the interest rate differential between the US and the Philippines.
For this week, Mr. Asuncion gave a forecast range of P54.50 to P55 per dollar, while Mr. Ricafort expects the peso to move within the P54.70 to P55.10 levels. — K.B. Ta-asan
