Peso seen closing the year above
The local currency is seen to settle above 151 to the US dollar this year as emerging market currencies, including the Philippine peso, will continue to be volatile in reaction to a tighter US policy stance, said Metropolitan Bank and Trust Co.’s research unit.
“Headwinds are still likely to result in volatility in the coming months as the global outlook remains uncertain,” according to Metrobank’s second quarter “Economic Weather Report.”
The weaker peso will also keep inflation above three percent this year or about 3.1 percent (from 2016’s 1.8 percent) along with base effects, higher imports, agriculture recovery and unstable global crude oil prices, it said.
A 151:$1 exchange rate will likewise hold the central bank’s monetary policy stance until end-2017, however with a depreciated peso value, stronger inflationary pressure and with the new tax rates from the tax reform package, the Bangko Sentral ng Pilipinas (BSP) will raise interest rates “down the line,” said Metrobank.
“Policy rate movements are not likely to happen this year amid still manageable inflation. In the coming months, the yield curve is seen to move sideways, with an upward bias, as investors focus on the US Fed’s next policy moves (in the latest FOMC meeting, the Fed stated that there is a plan to unwind its massive bond portfolio),” said Metrobank. “Conversely, the wider budget deficit amid the government’s plan to increase spending, especially on infra projects, is seen to temper the rise in yields.”
The bank’s peso forecast indicated the peso will close at 151.30 this year. The peso has been straggling at the 150-level for several weeks on account of a volatile global currency market and has dropped more than two percent since January.
The uneven global growth and the US interest rate normalization are the driving forces affecting the currency market, noted Metrobank. The local currency is currently trading within the 150-151 levels against the greenback, its weakest level in almost 11 years, on negative market sentiment, it added.
“The peso’s performance in the coming months will largely be influenced by the still volatile global financial market and the government’s ability to execute its infrastructure spending plan,” said Metrobank.
Higher spending for infrastructure development which would mean higher imports would result in more US dollar demand locally and this will pull up the peso above $51 for the year.
“Nevertheless, the Philippines’ solid macroeconomic fundamentals, even amid the still uncertain macroeconomic backdrop, will mitigate a sharp peso depreciation,” the bank noted.