DBS sees further weakening of Phl peso over next 2 years

DBS Bank Ltd. of Singapore expects the peso to weaken further to 56 to $1 over the next two years as the factors behind the depreciation of the dollar over the past year have started to reverse.

In a report, DBS expects the peso to end the year at 54.4 to $1 and at 56 to $1 next year, weaker than its earlier forecast of 52.8 to $1 for 2018 and 54.4 to $1 for 2019.

In its revised foreign exchange assumption, DBS sees the peso gradually depreciating to 52.6 in the first quarter, 53.3 in the second, 54 in the third, and 54.4 in the fourth quarter.

For 2019, the Singaporean investment bank said the local currency would further weaken to 54.8 in the first quarter, 55.2 in the second, 55.6 in the third, and 56 in the fourth quarter.

The peso this month weakened further and breached the 52 to $1 to hit its weakest level in almost 12 years. It is the weakest performing currency in the region, having depreciated by four percent against the greenback.

“We may have been a bit early with our call, but the factors behind the dollar’s depreciation over the past year have started to reverse,” the bank said.

It pointed out the US 10year treasury yield has been rising toward three percent since the start of 2018.

Unlike 2017, DBS said the US Fed is looking for inflation to rise toward its two percent target this year.

“Hence, we have upgraded our US growth outlook and brought forward our Fed hikes call by a quarter to March and June,” it added.

It said that only the Philippines and India have deteriorating current account positions in the region.

The US Federal Reserve has penned three rate hikes this year to match last year’s rate increases.

In contrast to the US that is facing upside risks to inflation, the consumer price index in China, Malaysia, Thailand, Korea and Indonesia appear to be heading sideways or modestly lower.

“As such, there appears to be little urgency for Asian central banks to follow the Fed’s footsteps in hiking rates. With macro stability risks largely not a concern, the focus is likely to be on supporting growth and managing persistent foreign exchange strength that has been playing out over the past five quarters,” DBS said.

In the case of the Philippines, the Bangko Sentral ng Pilipinas (BSP) now expects inflation to breach its two to four percent target for this year as the CPI (consumer price index) kicked up to its highest level in more than three years to four percent in January from 3.3 percent in December due to rising oil prices and the impact of the new tax law.

The BSP’s Monetary Board revised its inflation forecast to 4.3 instead of 3.4 percent for this year and to 3.5 instead of 3.2 percent for next year. The last time the Philippines overshot its target since the inflation targeting framework was adopted in 2002 was in 2008 when inflation kicked up to 9.3 percent due to surging oil and food prices

This prompted the BSP to raise rates by 50 basis points and the reserve requirement ratio for banks by two percent.