Peso may move sideways ahead of Fed policy meeting

THE PESO is expected to move sideways against the dollar this week, with a preemptive move by the central bank this month seen to give the currency support ahead of another aggressive rate hike from the US Federal Reserve.

The local unit closed at P56.28 per dollar on Friday, rising by seven centavos from its P56.35 finish on Thursday.

The peso also appreciated by eight centavos from its P56.36-a-dollar finish on July 15.

The local currency opened Friday’s session at P56.35 against the dollar. Its weakest showing was at P56.39, while its intraday best was at P56.27 versus the greenback.

Dollars exchanged went up to $789 million on Friday from $647.45 million on Thursday.

The peso strengthened versus the dollar on Friday following the downward correction of the dollar against major global currencies amid recession risks as well as the European Central Bank’s (ECB) bigger-than-expected rate hike, Rizal Commercial Banking Corp. (RCBC) Chief Economist Michael L. Ricafort said in a Viber message.

The ECB on Thursday raised its benchmark deposit rate by 50 bps to 0%, its first rate increase in 11 years and a departure from eight years of negative interest rates, to rein in runaway inflation. It also raised its main refinancing rate to 0.50% and signaled more hikes.

The dollar lost ground on the heels of the business activity data, as investors weighed slowing economic activity against easing inflation, Reuters reported.

The dollar index fell by 0.047%, with the euro down by 0.18% to $1.021.

For this week, Mr. Ricafort said the Bangko Sentral ng Pilipinas’ (BSP) surprise 75-basis-point (bp) rate hike on July 14 could lend support to the peso ahead of the Fed’s July 26-27 meeting, where it is expected to continue raising borrowing costs aggressively.

“The surprise +0.75 local policy rate hike to 3.25% effective July 14, 2022 is meant to support or at least stabilize the peso exchange rate, as part of the toolkit related to the exchange rate vis-a-vis the inflation-targeting framework since 2002 and the price stability mandate,” Mr. Ricafort said.

“This is a preemptive move on a possible large Fed rate hike of 0.75-1.00 to 2.50%-2.75% (upper range of the Fed target) in the next Fed rate-setting meeting, which would make the interest rate differential in favor of the US dollar … after US CPI (consumer price index) again posted a new 40-year high of 9.1% that could require more aggressive Fed rate hikes/monetary tightening to bring down elevated inflation,” he added.

UnionBank of the Philippines, Inc. Chief Economist Ruben Carlo O. Asuncion likewise said the BSP’s off-cycle hike, as well as lower oil prices, could prop up the peso against the dollar.

US crude settled down by 1.71% at $94.70 per barrel last week and Brent ended at $103.20, down by 0.64% on the day, Reuters reported.

Mr. Asuncion said the Fed’s review, where it is expected to raise rates by at least another 75 bps, will be the main driver of foreign exchange trading this week, as well as month-end corporate demand for the dollar.

He gave a forecast range of P56 to P56.60 per dollar for this week, while Mr. Ricafort expects the peso to move from a narrower band of P56 to P56.40. — D.G.C. Robles with Reuters