Peso seen further weakening to 62-63 vs $1
The combination of a prolonged war in the Middle East and a hawkish US Federal Reserve (Fed) could send the peso weakening to the 62 to 63 level, MUFG Global Markets Research warned.
In its monthly foreign-exchange outlook, MUFG said its baseline forecast still sees the peso trading between 60.5 and 61.5 over time. But a longer conflict and delayed rate cuts by the Fed could intensify pressure on the currency.
“In a risk scenario of prolonged conflict, we continue to see the Philippine peso as vulnerable and USD/PHP rising towards 62 to 63, especially if this is combined with a hawkish Fed,” the bank said.
The peso slid to another record low of 61.75 before trimming losses last Thursday. Markets were shut on Friday for the Labor Day holiday.
Last week, the Fed kept its benchmark rate in a 3.5 percent to 3.75-percent range in an 8-4 split decision. In the post-meeting statement, the committee noted that, “Inflation is elevated, in part reflecting the recent increase in global energy prices.”
The divided outcome lifted the greenback to a more than two-week high, while Brent crude climbed to its strongest level since March 2022, further bolstering the dollar’s appeal, according to Reuters.
As it is, a weaker peso brings mixed effects.
Remittances from overseas Filipino workers stretch further in peso terms, supporting consumption, while exporters gain price competitiveness. But the slide risks stoking imported inflation and raising the peso cost of servicing foreign-currency debt.
The latest bout of depreciation came despite the decision of the Bangko Sentral ng Pilipinas (BSP) to raise its key rate by a quarter point to 4.5 percent on April 23, the first tightening move in more than two years.
Looking ahead, MUFG said its baseline forecast assumes delayed Fed easing starting in September, while signaling that further BSP rate hikes could support the peso.
“Nonetheless, we expect USD/PHP to move lower directionally over time in our base case. First, we assume some gradual de-escalation and implicitly oil prices to fall over time,” the bank said.
“Second, USD/PHP at current levels is ‘cheap’ relative to fair value and our model shows that this gap should historically take around seven months to close half its value over time,” it added. “Third, we are seeing some initial signs of an improvement in government spending, and this should also help reduce domestic policy uncertainty, even as political noise remains quite high.”
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