THE US Federal Reserve’s expected policy easing towards the end of the year will help support the peso’s recovery against the dollar in the near term, Fitch Solutions’ unit BMI said.
“The Philippine peso has weakened by nearly 6.2% year-to-date, emerging as one of the weakest currencies in the region. Constant repricing of interest rate expectations in the US has led to much volatility in many emerging market (EM) currencies, and the peso is no exception,” it said in a report dated July 3.
“We think that the currency will reverse its losses in the fourth quarter once the US Federal Reserve begins its monetary loosening cycle in September. For now, we are holding on to our forecast for the peso to reach P56.50 per dollar by yearend, implying that it will strengthen by about 4% from the current spot rate of P58.70 a dollar. That said, our forecast hinges on the accuracy of our Fed projection,” it added.
The Development Budget Coordination Committee (DBCC) expects the peso to range from P56-P58 for this year.
On Thursday, the peso closed at P58.58 versus the dollar, rising by 14.5 centavos from the previous day’s finish.
Year to date, however, the peso is still down by P3.21 from its end-2023 close of P55.37.
The peso has been trading at the P58 range since late May as the Fed has continued to signal a “higher for longer” policy stance due to sticky inflation in the world’s largest economy, which has propped up the dollar against major and EM currencies.
The Bangko Sentral ng Pilipinas’ (BSP) comments on possibly starting its own easing cycle before the Fed have also contributed to the peso’s weakness against the greenback.
BMI said it expects the peso to undergo “additional volatility” in the short term as the timing of the Fed’s first cut remains uncertain.
“Indeed, market participants have grown increasingly pessimistic about the US loosening cycle, with markets pricing in fewer cuts by the end of 2024 compared to the 100-150 basis points (bps) expected at the start of the year,” it said.
“While it is widely expected that the Fed’s next move will be a cut, markets are uncertain about the timing and extent of policy easing. We think that this will only materialize in September, culminating in a total of 50 bps by yearend. Until then, constant fluctuations in market rate expectations will inject another layer of unpredictability into dollar strength, indirectly affecting the peso,” BMI added.
Fed officials at their last meeting acknowledged the US economy appeared to be slowing and that “price pressures were diminishing,” but still counseled a wait-and-see approach before committing to interest rate cuts, according to minutes of the June 11-12 session, Reuters reported.
The minutes, which were released on Wednesday, noted in particular a weak May reading in the consumer price index as one among “a number of developments in the product and labor markets” that supported a view that inflation was falling.
But in voting to keep the policy rate steady in the 5.25%-5.5% range where it has now been for a year, “participants noted that progress in reducing inflation had been slower this year than they had expected last December,” the minutes said, with “some participants” emphasizing the need for patience before cutting rates, and “several” citing the possible need to raise rates further if inflation resurged.
Investors broadly expect a quarter-percentage-point rate cut at the Fed’s Sept. 17-18 meeting and another one in December. The US central bank will hold its next policy meeting on July 30-31, when it is expected to leave its benchmark interest rate unchanged.
Meanwhile, the BSP’s recent dovish signals will also contribute to continued peso volatility, BMI added.
BSP Governor Eli M. Remolona, Jr. has said the Monetary Board is “on track” and “somewhat more likely than before” to slash rates at its Aug. 15 policy meeting as he expects inflation to further ease this semester with the implementation of lower tariffs on rice.
The BSP could cut rates by 25 bps in the third quarter and by another 25 bps in the fourth quarter, he added.
The Monetary Board’s Aug. 15 review is its only meeting in the third quarter. Meanwhile, its last two reviews for the year will be held in the fourth quarter and are scheduled on Oct. 17 and Dec. 19.
The last time the BSP cut borrowing costs was in November 2020, when it brought down its policy rate by 25 bps to a record low of 2% to help boost the economy at the height of the coronavirus pandemic.
“The BSP stands in contrast to its peers in Asia, which remain hawkish as regional currencies have declined this year. Even so, we do not think that this will actually happen. A preemptive move to cut ahead of the Fed will exacerbate weakness in the already battered currency. Instead, we think that the bank will only adjust monetary settings in concert with the Fed, with the first cut only materializing in October. If we are right, we could very well see the peso regain some of its footing against the greenback as market expectations reverse course,” BMI said.
“Risks to our currency forecast hinge on the timing of cuts by the BSP. If the bank were to go ahead with monetary loosening in August, this would exacerbate weakness in the peso, potentially breaching the P59 level…,” it added.
It said the peso’s movements against the dollar in the short term will also depend on the aggressiveness of the BSP’s presence in the foreign exchange market.
Mr. Remolona has said the central bank intervenes occasionally to prevent sharp swings in the currency and keep markets orderly.
“The BSP drew the line at the P59 level in 2022, and we think that policy makers will continue to intervene to prevent the peso from depreciating past this level,” BMI said.
Meanwhile, for 2025, expectations of further monetary easing in the US will help the peso “regain ground,” BMI said.
“For 2025, we are shifting our forecast to pencil in a slight strengthening of the peso on the back of 200 bps worth of cuts by the Fed. This is a slight departure from our previous projection for it to weaken. Even so, the bigger picture is that weak fundamentals will keep a lid on any appreciatory pressures on the currency,” it added.
It forecasts the peso to settle at P55 per dollar at end-2025. The DBCC sees the currency ranging from P55-P58 next year.
Risks to their currency outlook include the Philippines’ large current account deficit and elevated inflation, it said.
“The Philippines is likely to experience higher inflation rates than the United States, exerting downward pressure on the peso. Generally, prices in EMs like the Philippines rise more quickly than in developed economies… Persistent inflation in the Philippines means that a gradual depreciation of the peso might be necessary to keep the country’s competitive edge in the international market,” BMI said. — L.M.J.C. Jocson
