Early forecasts of a peso rebound against the US dollar have been all but forgotten as the stronger US economy and volatility in global markets have lowered expectations for the local currency, analysts and traders told The Manila Times.
With the peso closing above P45 to the dollar on successive days this week, forecasts for the exchange rate by year-end have been raised to a range of P44.70 to P46.00, in stark contrast to forecasts of a range of P41.00 to P44.00 at the beginning of the year by the Bangko Sentral ng Pilipinas (BSP) and French banking giant Credit Agricole.
Associate economist Nicholas T. Mapa of the Bank of the Philippine Islands (BPI) said BPI would maintain its earlier forecast of P45.15.
“We expect the USD/PHP to settle at this rate more because of a strong USD as the Fed readies for its interest rate hike cycle in 2015,” Mapa explained.
The BPI economist also suggested the weaker peso will have a negative impact on the government securities (GS) market. “Furthermore, we expect portfolio investments to take a hit as foreign investors books gains and seek greener pastures. In the local GS market, foreign players will no longer see value in investing in the short-end of the curve, as they had previously invested in Philippine T-bills because markets expected a peso appreciation. With expectations for the peso to weaken, foreign players may no longer see much value in T-bills,” Mapa added.
ING Bank regional economist Tim Condon, on the other hand, identified some effects on the peso arising from the BSP’s management of foreign reserves, in connection with the decline in the country’s balance of payments (BOP) surplus for October.
“Foreign reserves contracted 0.4 percent month-on-month in October, which indicates what happened to the overall BOP position,” Condon said. October’s BOP surplus was $24 million, down from $98 million the previous month.
“We conjecture that $80 billion in foreign reserves was a threshold for the BSP, which basically stopped accumulating reserves once they reached that level in late 2012 [The country’s gross international reserves stood at $79.39 billion in October]. This and absence of forward market intervention lead us to conclude that USD/PHP is subject to equal two-way risk. ING’s yearend USD/PHP forecast is 44.70,” Condon explained, mentioning also that the spot forecast stood at 44.99, a consensus of analysts polled by Bloomberg at 45.00, and the price for non-deliverable forwards (NDFs) at 45.10.
Three local banks heavily involved in currency trading (and declining to be identified for that reason) contacted by The Manila Times offered forecasts of P46.00, P45.10, and P45.30 respectively, citing sustained dollar strength and the likelihood of US Fed interest rate hikes as the main drivers of the exchange rate.
In late June, the BSP revised its earlier forecast of P41 to P44 downward to a range of P42 to P45, at the time citing volatility in global markets and rising Philippine imports as signs the peso would weaken.