THE PESO rebounded against the dollar on Wednesday to a fresh one-month high amid better risk appetite from investors on the back of positive developments in the US-China trade talks.
The local unit ended the session at P52.345 versus the greenback, higher than the P52.47 finish last Tuesday. This was the peso’s best in more than a month or since it closed at P52.32 against the US currency on Dec. 3.
The peso traded stronger the whole day, opening the session at P52.41 per dollar. Its intraday low stood at P52.43 before closing the session at its high.
Dollars traded declined slightly to $775.64 million from $798.9 million the previous session.
Foreign exchange traders interviewed yesterday attributed the strengthening of the peso to the risk-on sentiment from market players following the conclusion of the US-China talks in Beijing.
The two countries extended their trade talks for an unscheduled third day, boosting market optimism that Washington and Beijing can strike a deal. If no deal is reached before the 90-day truce ends on March 2, US President Donald Trump has said he will proceed with slapping increased tariffs to 25% from 10% on $200 billion worth of Chinese goods, according to a Reuters report.
“There was a lot of risk-on sentiment throughout the day, especially with our stock market breaking the 7,900 level today,” the trader said in a phone interview.
The trader added that the peso traded “fairly quietly” for most of the day, except towards the end where he saw a surge of selling.
Meanwhile, another trader said the peso traded stronger against the dollar on Wednesday, mimicking the move of the Asian currencies versus the greenback.
For today, the first trader expects the peso to trade between P52.25 and P52.45, while the other gave a P52.20-P52.50 range.
“The peso might strengthen further on expectations of possible dovish tone from the minutes of the December 2018 Fed[eral Reserve] policy meeting,” another trader said in an e-mail.
But the peso is seen to decline further by three percent by the end of the year as inflationary pressures are likely to remain elevated, Fitch Solutions said, noting that its depreciation in the near term will be somewhat modest compared with 2018.
“Over the longer-term, higher inflation will continue to drive the PHP weaker,” Fitch Solutions said in a report published on Wednesday, expecting the local unit to decline to P54.15 versus the greenback by end-2019.
“From a longer-term perspective, we expect the Philippine peso to maintain its multi-year trend of depreciation given that inflationary pressures are likely to remain elevated versus the US.”
The research unit of the Fitch Group forecasts that headline inflation will average 4.7% through 2020, compared with 2.3% in the US, as previous years of monetary policy continue to unwind, with credit growth remaining “substantially above” nominal gross domestic product growth.
Inflation in December eased to 5.1% from the 6% recorded in November as food and transport prices grew at a slower pace, the Philippine Statistics Authority reported.
This brings the country’s full-year inflation average at 5.2%, the highest since 2008’s 8.2% and faster than the central bank’s 2-4% target range.
In 2018, the Bangko Sentral ng Pilipinas cumulatively raised its benchmark interest rates by 175 basis points to rein in inflation as well as price expectations.
“Meanwhile, the real effective interest rate is currently around fair value as compared with its historical average…suggesting that valuations will not act as a tailwind as it did in Q418,” Fitch Solutions added.
Over the coming months, Fitch Solutions said the peso will “continue its weakening trend against the US dollar,” albeit modest compared with 2018 given the decline in oil prices as well as growing downside risks to broad greenback strength.
“We expect the Philippine peso to weaken slightly against the dollar within the trend channel in the near-term given the persistent twin deficit situation, political uncertainty, and a still-negative real interest rate differential with respect to the US.”
Fitch Solutions said the country’s twin deficits, or the current account and fiscal deficits, has “widened considerably over the past few quarters,” as this is expected to remain elevated partially due to the state’s expansionary fiscal agenda.”
Meanwhile, the real interest rate differential against the US is still in the negative territory, with the central bank expected to remain reactive than proactive and as local yields remain higher in neighboring countries such as Indonesia and Vietnam.
Political uncertainty will also pose risk to the local unit, as the Duterte administration seemingly faces a domestic backlash over its closer relations with China.
“[T]his could have negative implications for his allies at the upcoming May 2019 mid-term elections, and result in further political uncertainty.” — Karl Angelo N. Vidal