Mixed signals from rich countries to weaken peso, bonds


The difference in the monetary policies of a fast expanding US economy and the weaker Japanese and European economies may make yields in the local bond market and the peso less attractive to foreign investors.

But central bank governor Amando Tetangco Jr. feels that given the US Federal Reserve’s “patience,” in keeping interest rates low, some more “juice” can be squeezed from the interest differential in favor of the emerging market bonds before “shifting” more aggressively to the dollar.

The peso, Tetangco said, continues to be resilient because of strong of seasonal flows but warned that the divergence of policy in advanced economies and the improving United States economy could weaken the local currency.

In an interview with New York-based think tank Global Source Partners, Tetangco said the peso has so far remained resilient because of the support coming from the overseas Filipino remittances and portfolio inflows.

“Global investors will continue to take their cues for capital flows from this divergence,” he said.

With this, some downward move on the peso can be expected, he said. Despite this, the BSP governor stressed that the central bank policy on the exchange rate remains the same—to keep the value of the peso essentially market determined.

Latest data from the BSP showed that personal remittances by overseas Filipino workers (OFWs) grew 6.9 percent year-on-year to $2.46 billion in October, while cash remittances, or those coursed through banks, rose 7 percent to $2.22 billion.

On the other hand, foreign portfolio investments or “hot money” transactions in November showed a net inflow of $368.92 million.

However, Tetangco noted that at the moment, there is a growing market view for a stronger US dollar due to the strengthening US economy.

The BSP governor said the strong US dollar story that began to consolidate in September has caused foreign and domestic yield curves to either flatten or shift up a bit and emerging market economies (EME) currencies, including the peso, to weaken.

“However, with markets now seemingly one, interpreting as somewhat clearer, the policy normalization path for the US interest rates and two, expecting continued easy monetary conditions in Japan and EU, the recent slide in EME markets, including in the Philippines, has somehow ebbed, global risk appetite looks to be “on” again, resulting in some firmness in EME bond markets and currencies,” he said.

In this regard, the BSP governor believes that the fundamental strength of the EMEs including the Philippines remain a pull factor for investors to keep a portion of their portfolio in these economies.

“The recent Moody’s upgrade should keep the Philippines firmly in the investor radar screen,” he added, referring to the recent upgrade of the country’s investment grade rating of Baa3 to Baa2.


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