The impact of the pandemic on currencies around the world, and the forex market, is difficult to fully appreciate. It may even be too early to quantify exactly to what extent the pandemic has affected the world’s financial market. The tourism, hospitality, and travel industries were all rattled to their cores by the various lockdowns around the world.
Despite this, in the initial first 6 months, forex seemed to be largely unconcerned. By early 2021, increasing volatility has been the marked reaction of many currencies to the various twists and turns of the global health crisis. Even the fastest-growing economies in the world weren’t excused from the sharp increase in fluctuations, including the Philippine peso.
The Philippine economy was submerged into a strict approach to lockdowns, typical of many of the satellite countries to China. In Q2 2020, the Philippine economy actually suffered one of the biggest contractions, shrinking by 16.5% year-on-year, producing its first official recession in 30 years. However, a combination of its unique economic makeup and the pressures of the pandemic led to an environment where the Philippine peso has challenged even the mighty U.S. dollar, and it may continue to do so.
The Current Situation
The Philippine peso’s moment in the sun began in late 2020. The currency strengthened by a remarkable 4% against the dollar by September 2020, outperforming all its APAC counterparts. Only the Chinese yuan and Taiwanese dollar also made gains on the U.S dollar during this time. Largely, the growth was attributed to a complete dropoff in imports, as a precautionary measure against a novel Coronavirus. With an import fall larger than the exports, the Philippine peso flourished.
A Fitch Solutions report from late 2020 explained; “As domestic restrictions measures are eased, we forecast a gradual reversal of the current account’s improvement”. This seems to be a reasonable assumption to make given the tenuous nature of the economic benefits of a pandemic.
However, there is no ruling out a continuation of the trend of the strong peso, especially if Philippine demands for imports do not increase, whilst exports recover. A year of isolation and lockdown could potentially have allowed the Philippines to streamline and improve their self-reliance for certain goods or services, thus keeping imports down.
A Powerhouse in the Making?
The Philippines is already a popular market amongst investors as one of Asia’s fastest-growing economies. There is no guarantee the pendulum simply swings the other way once again. Institutional and retail investors alike are closely watching the progress of the peso as 2021 progresses. Unseen obstacles are easily thrown up: new viral variants, future lockdowns, recovering industries, and continued vaccination schemes are all ongoing efforts that make the future of the peso a subject of interest.
Meanwhile, over in the States, the U.S. dollar’s difficult year is speculated to be coming to an end too. Bullish investors are ready and waiting for a recovery, buoyed by a successful vaccination rollout in North America, and a strengthening dollar over European allies. Some analysts have forecasted an improvement to 1.15 dollars per euro by the end of 2021.
We’re left now with a further six months of uncertainty that entirely hinges on the pandemic’s second year of existence as one of either further complications or a gradual reduction in severity. It’s clear that uncertainty will contribute to further volatility, so for the time being forex traders interested in the Philippine peso’s continued shifting position against the dollar are best advised to continue monitoring the situation closely, as there are no guarantees either way just yet.
