Peso to weaken after strong US GDP data

THE PESO may move sideways versus the dollar this week after the US economy grew faster in the second quarter and amid bets of softer key US economic reports and uncertainties in Europe.

The local currency closed at P50.57 per dollar on Friday, nearly unchanged from its previous finish of P50.56 against the greenback.

Week on week, however, the peso gained 14 centavos from its P50.71-a-dollar close last July 21.

Traders and analysts said the peso could continue consolidating versus the dollar this week, taking its cue from second quarter US gross domestic product (GDP) growth.

Land Bank of the Philippines (Landbank) market economist Guian Angelo S. Dumalagan said the peso will likely move sideways versus the greenback this week amid bets of softer personal consumption expenditure (PCE) inflation, non-manufacturing and manufacturing data, to be offset by likely better employment and pending home sales data.

“On Monday, the dollar might depreciate, continuing its weakness last Friday evening, following the release of the US GDP growth report, which showed an acceleration of growth in second quarter but revealed a slower expansion in the first three months of the year,” he said in his weekly outlook.

Similarly, a trader said by phone on Friday that the exchange rate will take its cue from the second quarter US GDP data.

Reuters reported that US economic growth in the April to June period accelerated at a 2.6% year-on-year rate, faster than first quarter’s downwardly revised 1.2% GDP growth, on the back of rampant consumer spending and corporate investments on equipment

Despite upbeat data, market players may revert their attention to the result of the US central bank’s July policy meeting, which may put downward pressure on the greenback.

“While this report might not preclude the possibility of the another US rate hike this year, it might make the dollar less attractive by diverting investors’ attention back to the cautious tone of the US Federal Reserve during its July policy meeting,” Mr. Dumalagan noted.

He however said the foreign currency could rebound on Tuesday on likely strong US pending home sales data, but may continue slumping versus the peso afterwards on likely weak PCE inflation manufacturing and non-manufacturing reports.

“Despite these potentially weak reports, views of another rate hike this year might still remain intact amid bets of firm US labor data on ADP employment and non-farm payrolls. These labor reports might partly trim the dollar’s projected decline,” Mr. Dumalagan noted.

Aligned with market expectations, Fed policy makers decided to leave interest rates unchanged during their two-day July Federal Open Market Committee meeting, although noting that both overall inflation and a measure of underlying price gains had declined — trends which have worried some policy makers — but that it expected the economy to continue strengthening.

Meanwhile, Mr. Dumalagan said the dollar could revert its projected downward trend on the back of likely upbeat US PCE inflation, manufacturing and non-manufacturing and bets of softer economic reports in Europe.

“A soft inflation report from the euro area could also reverse the dollar’s forecasted weakness by reducing the likelihood of an early tapering by the European Central Bank. Dovish news from the euro area sometimes translates to a weaker peso by making the dollar more attractive against a basket of other currencies,” he said.

Mr. Dumalagan expects the peso-dollar pair to trade between P50.40 and P50.70 this week.

Asked if there are other local factors that could drive the exchange rate, the trader said they continue to see dollar demand from corporates, which could continue to support the dollar.

For his part, BDO Unibank, Inc. Chief Market Strategist Jonathan L. Ravelas said the peso may weaken to as low as P51.50 per dollar this week. “[Last] week’s close at P50.57 supports a near-term top could be in place at P50.95. Look for a break below P50.40 to confirm said top and see a possible test towards the P50.25 levels. Otherwise, the present movement is a mere consolidation and could still test the P51.00/P51.50 levels. Trading range [this] week is seen between P50.40 — 50.70 levels.”

Meanwhile, a July 26 report by HSBC Global Research said they have retained their yearend projection of P51-per-dollar level, but noted a “soft USD environment will ultimately help prevent the exchange rate from pushing significantly higher” as well as the Bangko Sentral ng Pilipinas’ (BSP) foreign exchange policy.

As regulator of the Philippine financial system, the BSP intervenes in the local exchange market to temper any sharp swings of the peso.

“Signs that the volatility is increasing and that speculative investors could be having a greater influence on the currency could encourage the central bank to be more active in the FX (foreign exchange) market,” HSBC said.