“The peso actually depreciated on account of pronouncements of some Fed officials that even if inflation is still off-target, the fact that labor market conditions are becoming tighter, that would in effect be transmitted in terms of higher inflation. As the labor market continues to tighten, there would be some pressure on inflation moving forward,” Bangko Sentral ng Pilipinas (BSP) Deputy Governor Diwa Guinigundo told reporters on Thursday.
Guinigundo said because of that, the market thought that is a definitive clue that the Fed they will continue tightening monetary policy in the US–that means one more time before end of year, and two to three times in 2018.
“That’s one of the major reasons why the dollar became strong relative to the peso,” he said.
The Philippine peso slipped against the US dollar in Thursday trade, hitting a 15-week low of P50.37 as the market perceived a strengthening of the greenback even amid mixed signals on US inflation and interest rates from Federal Reserve officials.
The peso lost P0.07 in opening trade at P50.22, weakening further to P50.37 before paring its losses to P0.05 at P50.34 by the close.
The day’s low of P50.37 was the weakest for the peso since March 9 this year, when it reached P50.39:$1.
“The peso actually depreciated on account of pronouncements by some Fed officials that even if [US] inflation is still off-target, the fact that labor market conditions are becoming tighter, that would, in effect, be transmitted in terms of [or translate into]higher inflation. As the labor market continues to tighten, there would be some pressure on inflation moving forward,” Bangko Sentral ng Pilipinas (BSP) Deputy Governor Diwa Guinigundo told reporters after the board meeting.
Given that, he said, the market saw it as a definitive clue that the Fed would continue tightening the monetary policy in the US – that means one more time before the end of year, and two to three times in 2018.
“That’s one of the major reasons why the dollar became strong relative to the peso,” Guinigundo said.
The dollar also extended gains against the yen on fresh indications the Federal Reserve will lift interest rates again this year.
“Fed speak was mixed. Boston Fed President Eric Rosengren said low rates pose financial stability risks but Dallas Fed President Robert Kaplan, a voter in the FOMC [Federal Open Market Committee] this year, sounded concern over weak inflation but considers it to be likely transitory,” Metrobank Research said.
Earlier, New York Fed President Willian Dudley said he expected that a tight labor market would eventually trigger a rebound in the unexpectedly weak inflation data, but that he was confident the US expansion had further to go, while cautioning of risks in not raising interest rates.
The Fed recently raised its benchmark interest rates, citing a better labor market and moderately improving economic activity. The US central bank also continued to project a third rate increase this year, essentially brushing aside weaker inflation and consumption data in recent weeks.
Metrobank also noted that the oil price, which had dropped to seven-month lows, set a risk-off tone, with the WTI falling below $43 per barrel amid concerns the Organization of Petroleum-Exporting Countries-led output cuts would not succeed in rebalancing the market.
The peso first touched the P50:$1 level, a 10-year low, on November 24 last year as bets on interest rate hikes in the US—which actually happened in December—favored the dollar. It depreciated by 5.35 percent against the dollar last year.