Peso seen to depreciate vs the dollar on rising US yields, global oil prices

THE PESO will continue depreciating versus the dollar in the next three to six months due to headwinds such as higher US bond yields and oil prices, as well as the fresh surge in infections, Fitch Solutions Country Risk and Industry Research said in a report.

“We believe emerging market currency volatility, including for the peso, is likely to remain elevated over the coming months, while oil prices will remain elevated will be an additional headwind to the currency,” Fitch Solutions said in a note on Monday.

It noted the peso has weakened by 1.2% as of March 16, making it an underperformer in the broader MSCI Emerging Markets Currency Index that depreciated by 0.6% in the same period.

Global developments including rising US bond yields and oil prices are expected to cause the peso to decline further versus the dollar, Fitch Solutions said. It expects the unit to move at an average rate of P48.40 per dollar this year from P47.50 previously.

“Our view for a temporary trend of higher US Treasury yields means emerging market currencies are likely to suffer, particularly in overvalued or growth underperforming markets,” Fitch Solutions said.

US benchmark yields have been rising in the past weeks, with the 10- and 30-year Treasury papers reaching their highest yields since January 2020 and August 2020 on Thursday, Reuters reported.

Meanwhile, Fitch Solutions said the increase in oil prices puts pressure on the peso’s strength as this could increase the country’s import bill.

The increase in infections here has also hurt investor sentiment in the country and local financial markets, Fitch Solutions said.

“Another lockdown could see foreign investor sentiment around the peso weaken even further,” it said.

Officials from the Bangko Sentral ng Pilipinas (BSP) meanwhile said the currency is likely to remain stable even with these risks and as the crisis drags on.

“Possible forces that can support the peso will be expected pickup in demand from the external sector as the global economy continues to improve,” BSP Department of Economic Research Senior Director Zeno R. Abenoja said in an online briefing on Friday.

The central bank last week said it expects both exports and imports to grow by 8% (from 5%) and 12% (from 8%) this year.

Last year, exports slumped 10.1% to $63.8 billion from a year earlier while imports shrank 23.3% to $85.6 billion, based on data from the Philippine Statistics Authority.

“[W]e also foresee the GIR (gross international reserves) remaining adequate, this constitutes a good factor and could also support the peso moving forward,” Mr. Abenoja added.

Latest central bank data showed GIR stood at $109.082 billion as of end-February. The BSP expects the country’s reserves to reach a record $114 billion by yearend.

“We actually have become more optimistic… All of these are going to argue of continued stability in our foreign exchange position,” BSP Deputy Governor Francisco G. Dakila, Jr. said at the same briefing. — L.W.T. Noble