THE PESO is expected to move sideways this week amid mixed economic signals in the US tempered by risk aversion among market players.
The peso ended last week at a seven-week high of P53.64 versus the greenback from its previous close of P53.80 on Thursday.
It also strengthened week-on-week from its P53.70-per-dollar finish on Oct. 19.
A foreign exchange trader said the peso’s performance in the coming days will be “dependent on the dollar’s strength,” as investors may veer away from riskier currencies to safer units such as the dollar.
Meanwhile, Land Bank of the Philippines market economist Guian Angelo S. Dumalagan said the greenback’s sideways movement with a downward bias may be tempered by safe-haven buying amid lingering geopolitical concerns abroad and elevates stock market volatility.
Wall Street remained down last Friday as concerns about a slew of disappointing earning forecast persisted, with the market pricing in how tariffs, higher borrowing costs and geopolitical concerns hurt companies, Reuters reported.
“On Monday, the dollar might depreciate due to receding expectations of another US rate hike in December 2018,” Mr. Dumalagan said in an e-mail yesterday.
The US economy grew at a 3.5% pace in the third quarter, faster than the 3.4% market consensus. Despite the faster-than-expected gross domestic product growth print, the personal consumption expenditure (PCE) price index, the preferred inflation indicator, rose 1.6% in the July-September period year-on-year, slower than the 2.2% projected by economists.
“US PCE inflation for the for the same three-month period fell below market expectations, reducing the chances of a third US rate hike this year,” Mr. Dumalagan said, adding that the dollar may further deteriorate due to the downward revision in the US consumer sentiment for October, which stood at 98.6 from a previous reading of 99.0.
The greenback may recover on Tuesday and Wednesday due to possibly upbeat economic readings in the US.
“PCE inflation for the month of September 2018 is expected to remain above the 2% target of the US central bank, while personal income and personal spending for the same period are both expected to grow by 0.4% month-on-month after gaining 0.3% each in August 2018,” the market economist added.
He noted these may revive views of a third US rate hike this year.
Local financial markets are closed on Thursday and Friday due to All Saints’ Day holidays.
For this week, Mr. Dumalagan expects the peso to move between P53.50 and P54, while the trader gave a P53.50-P53.90 range.
Meanwhile, the peso may trade as low as P56.50 versus the dollar next year, a global bank said, as the currency reels from trade and budget deficits coupled with rising global interest rates.
Philip Wee, foreign exchange strategist at DBS Bank, said the local unit will likely sustain its depreciation trend over the coming year as it remains under pressure from both domestic and external pressures.
“The twin (current account and fiscal) deficit currencies — Indian rupee, Indonesian rupiah and Philippine peso — are expected to keep depreciating throughout the Fed hike cycle that ends in 4Q19,” the global bank said in its monthly report published over the weekend. These three currencies have shown the biggest declines versus the US dollar this year across the region.
After touching a 12-year low of P54.325 versus the greenback in late September, the peso recovered in recent weeks to its best showing in over a month last Friday. Analysts attribute this to improving market sentiment, as well as the hedging facility revived by the central bank have started to ease pressures on the spot rate.
DBS sees the peso closing at P54.50 by yearend, only to further weaken going into 2019. The bank estimates the exchange rate at P55 versus the greenback by end-March, P55.50 by the second quarter, and P56 to $1 by the end of the third quarter. By end-2019, the peso could pierce a fresh low of P56.50.
The rupee is likewise seen to mirror this trend at INR78 by end-2019 coming from a INR74 forecast versus the dollar this year, while the rupiah is projected to weaken to Rp 15,900 from Rp15,300 close expected this December.
Despite the currency weakness, Mr. Wee said India and Indonesia “have proven their resilience” to emerging market stress and rising global yields — but the Philippines, not as much.
“The Philippines, on the other hand, has yet to assuage concerns that its economy may be overheating,” the report read, pointing out the wider current account deficit which the country is seeing.
“The trade deficit has, on strong demand for imports driven by the government’s high infrastructure spending, widened aggressively and overtook overseas foreign worker remittances.”
The current account, which measures fund flows drawn from goods and services trading, posted a $3.1 billion deficit as of end-June. This ballooned from a $133-million gap during the same period in 2017, and already matches the full-year estimate as imports continue to grow by double-digit while exports remain slumped year-on-year.
A current account deficit is said to weigh down investor appetite towards the Philippines, and thus adds to external pressures towards emerging market currencies like the peso. The Philippines has been seeing current account surpluses until a reversal in 2017, although authorities said this simply reflected increased domestic economic activity given heavy importations for the local infrastructure drive.
This comes as the national government kept its budget deficit program at three percent of gross domestic product (GDP) and went against the advice given by the International Monetary Fund to keep the fiscal gap at a more modest 2.4-2.5% of GDP.
On top of this, inflation has also surged to fresh nine-year highs and logged at five percent as of end-September, well above the 2-4% target set by the central bank.
“The odds of the Philippine peso hitting a new all-time low over the next 12 months cannot be fully discounted,” the Singapore-based bank said.
Economic managers of President Rodrigo R. Duterte now expect the peso to average between P53.50-P53 versus the greenback this year, and within P52-55 annually from 2019 to 2022.
In a separate commentary, ANZ Research also noted that the Philippines’ low saving rates in the region also “increases its external vulnerability during phases of high growth,” even as investment spending has been logging fresh highs due to the local infrastructure drive. — Karl Angelo N. Vidal and Melissa Luz T. Lopez