The Philippine peso is heading for its biggest quarterly gain in a decade and still has scope to appreciate due to positive fund flows, according to Credit Agricole SA and Nomura Holdings Inc.

The local currency has now strengthened 4.6% this year, beating all its developing-nation counterparts over the period except the Bulgarian lev, according to data compiled by Bloomberg. The rally has been driven by an expanding balance-of-payment surplus, increasing foreign reserves, and an unexpected rebound in remittances.

The peso has been at the vanguard of a rally in emerging-market currencies as they have bounced back from the coronavirus shock in March, aided by record stimulus from central banks around the world and a weakening dollar. That’s on top of recent economic data signaling that the worst of the impact from the pandemic may now be over.

“The balance-of-payments picture for the peso has turned a lot more positive,” said Eddie Cheung, an emerging-markets strategist at Credit Agricole in Hong Kong. “The trade deficit has narrowed, significantly boosting the current account. Combined with the resilience of remittances, these are factors leading us to think the peso has room to advance.”

The Philippine currency has rallied 2.9% this quarter to trade Wednesday at 48.41 per dollar after advancing to 48.350 on Sept. 16, the strongest level since November 2016. It will appreciate to 48 by year-end, according to Credit Agricole’s latest forecast.

The nation’s balance-of-payments surplus widened to $657 million in August, beating the average of $171 million for all months over the past five years, while foreign reserves jumped to a record $99 billion, from as low as $75 billion in October 2018. Remittances rose more than 7% for a second month in July, defying forecasts for a decline.

While there are plenty of peso positives, not everyone is optimistic. One of the major risks to further gains is potential central-bank intervention to curb the currency’s strength, according to Credit Suisse Group AG.

Policy makers seem to be becoming less comfortable with the peso’s strength as time goes by, said Julian Wee, a Singapore-based investment strategist at the bank, which predicts the currency will weaken to 48.8 per dollar by year-end. Increased intervention will help limit near-term outperformance, and most likely lead to some amount of depreciation, he said.

Strategists as a whole are also less than enthusiastic. The median forecast in a Bloomberg survey is for the peso to be little changed at 48.6 by the end of the year, and then weaken to 49.1 by the middle of 2021.

For Nomura’s Dushyant Padmanabhan, the main driver of short-term gains is the jump in remittances.

Funds sent home from abroad have been rising as overseas workers help families suffering from job losses amid the pandemic. Overseas cash remittances via banks climbed 7.8% in July from a year earlier to $2.78 billion. These were expected to fall 5.4%, according to a Bloomberg survey. Remittances are the nation’s largest source of foreign exchange after exports, and account for about 10% of the economy.

“The strong bounce in remittances is definitely a positive for the peso, and together with the weak dollar environment, it has room to appreciate more,” Mr. Padmanabhan in Singapore said, predicting the peso will end the year at 47.5 per dollar. — Karl Lester M. Yap/Bloomberg

RELATED ARTICLESMORE FROM AUTHOR