Peso drops on Fed rate hike bets
THE PESO dropped anew against the dollar on Wednesday as market players are now pricing in a higher chance that the US Federal Reserve would tighten policy rates once more in June.
The peso settled at P49.78 versus the greenback yesterday, 10-and-a-half centavos weaker than its P49.675 finish on Tuesday.
The local currency opened Wednesday’s session strong at P49.67 against the foreign currency and peaked at P49.645. However, it dropped in the afternoon session, with its worst showing logged at its closing rate.
Dollars traded reached $ 620.4 million, lower than the $674.8 million that changed hands the previous session.
One trader attributed the peso’s decline against the foreign currency to market expectations of a more than 50% chance that the US central bank will hike interest rates anew in less than a month.
“We are relatively seeing broad US dollar move higher, for which probably one of the reasons why is because the probability that the
Fed may increase rates in June and September,” the trader said in a phone interview on Wednesday, citing fed fund futures prices.
The trader said markets had previously expected a 56% chance that the Fed may hike rates in June, but this probability rate rose to around 72.6% yesterday.
“Market players have somehow redialed that their expectations… So if the market is pricing in a June rate hike, that’s probably one of the reasons why the dollar continued to trade higher across the board,” the trader noted.
Global markets are anticipating the US central bank to raise rates at least two to three times this year after it hiked borrowing costs during its March 14-15 Federal Open Market Committee (FOMC) meeting by 25 basis points to between 0.75-1%, shortly after policy makers decided to raise interest rates last December 2016.
In early trading on Tuesday, federal funds futures implied traders priced in a nearly 71% chance the Fed would raise rates to a range of 1.00-1.25% at its June 13-14 policy meeting, versus 67% late on Monday and about 53% on Friday, CME Group’s FedWatch tool showed.
In contrast, another trader said in a phone interview yesterday that there was not much market activity as the peso-dollar pair was seen trading within range.
“Nothing significant happened, although we saw commercial flows in the morning,” the trader said.
For Thursday, one trader said the peso may play within P49.65 to P49.85 against the greenback, while the other trader sees the pair trading within P49.60 to P49.88 range.
Most emerging Asian currencies were stronger on Wednesday with the Taiwan dollar at a twoand-a-half year high, spurred by persistent foreign inflows, while the Indian rupee climbed to a 20-month peak, buoyed by a local stock market rally.
The Taiwan dollar rose for a fifth day and was at its strongest level against the US dollar since September 2014.
The currency tracked the strength in local equities, which rose mirroring an overnight rally on Wall Street and as retail investors joined the foreign buying spree.
The Indian rupee gained for a third straight session and took cues from the record rally in local share market after a host of strong domestic quarterly results and hopes for additional foreign inflows to India boosted sentiment.
Meanwhile, investors in broader Asia shifted their focus to a major tax announcement by US President Donald J. Trump. He is set to unveil a tax plan on Wednesday, with markets anticipating a sharp slash in corporate income tax rates.
Mr. Trump’s proposal to exclude the controversial “borderadjustment” tax on imports will come as a relief for export oriented countries such as Taiwan and South Korea.
The dollar surged against the safe- haven yen on Tuesday as strong new US home sales data and optimism surrounding the expected tax reforms soothed sentiment. The Japanese central bank announces the outcome of its monetary policy meeting on Thursday and is expected to keep its policy settings steady.
The ringgit rose for a second day to a five-month peak. Recently, Bank Negara unveiled plans to ease the hedging rules in the onshore foreign exchange and bond markets in Malaysia.