THE PESO strengthened for the third consecutive day on the back of market optimism on prospects of a gradual reopening of some economies as well as expectations of a dovish stance from the US Federal Reserve.

The local unit closed at P50.51 per dollar on Wednesday, surging by 16 centavos from its P50.67 finish on Tuesday, according to data from the Bankers Association of the Philippines.

The peso started the session at P50.62 versus the dollar. Its weakest showing was at P50.64, while its strongest was at its finish of P50.51 against the greenback.

Dollars traded increased to $498.5 million on Wednesday from the $363.53 million seen on Tuesday.

A trader said the peso’s strength came amid market optimism due to the gradual lifting of lockdowns in some parts of the world.

“Dollar-peso was sold off today on back of weaker dollar given the risk-on sentiment across the market with some countries slowly opening their economies,” the trader said in a phone call on Wednesday.

Reuters reported that Spain unveiled a four-phase plan on Tuesday to lift its lockdown as deaths related to the virus begin to subside.

According to Spanish Prime Minister Pedro Sanchez, the lifting of some restrictions will start on May 4 and its effectivity will vary per province.

The Spanish government said remote working will be recommended where possible until reaching the last phase of the plan towards the end of June, when beaches would also be able to reopen with the support of local authorities.

Spain joins other countries that have bared plans to gradually lift lockdown including France and Italy as well as some states in the US.

Meanwhile, another trader said the peso’s gain came ahead of another policy decision from the Fed this week.

“The peso appreciated today from profit-taking ahead of likely dovish cues from the US Federal Reserve policy meeting later this week,” the second trader said in an e-mail on Wednesday.

The Federal Reserve is widely expected on Wednesday to lift the interest rates that influence its fed funds target, a technical move that could keep interbank lending running smoothly and help prevent financial market disruption should the benchmark rate fall below zero.

The effective fed funds rate dropped as low as 0.04% twice in the past week. That matched the level set in December 2011, two years after the economy emerged from the last recession, heightening concerns among some investors that it could go negative for the first time in the wake of the Fed’s aggressive moves to limit market damage from the coronavirus outbreak.

The fed funds rate declined despite the $1.35 trillion in Treasury bills brought to the market in the past four weeks, as low rates on repurchase agreements and depressed yields on Treasury bills resulted in more inflows into the fed funds market.

A negative effective fed funds rate would imply that banks are willing to pay to lend funds overnight to each other, and indicate the market expects the Fed to take interest rates below zero.

The first trader sees the peso playing around the P50.40 to P50.70 levels versus the dollar, while the second trader gave a forecast range of P50.40 to P50.60. — L.W.T. Noble with Reuters

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