Roughly balanced upside and downside pressures could keep the peso in P51:$1 territory for the rest of the year, BMI Research said.
“Following recent weakness in the PHP (Philippine peso), we expect sideways trading in the near-term as real interest rate differentials are unlikely to narrow further in favor of the US with the BSP (Bangko Sentral ng Pilipinas) looking likely to hike interest rates in the coming months,” the Fitch Group unit said in a report released over the weekend.
BMI said the peso was looking technically weak and added that an ongoing rally in oil prices would be negative for the Philippines in terms of trade.
The peso was also described as one of the worst performing currencies in Asia year to date, having weakened by around 2.4 percent against the dollar.
“However, in total return terms, the peso has still outperformed the greenback, which was in line with our view,” BMI pointed out.
The Bangko Sentral, BMI said, is likely to hike interest rates by 25 basis points before the end of 2017 and once again next year, which will likely be supportive of the peso.
“Over the near-term, we hold a neutral view on the PHP as upside and downside pressures appear roughly balanced, informing our forecast for the currency to end the year at PHP51.00/USD,” it said.
Over the longer term, the research firm expects the peso to strength-slightly.
“From a fundamental perspective, we expect the PHP to exhibit a slight appreciatory bias against the dollar in the coming quarters on the back of higher real interest rate vis-à-vis the US, anchored inflation expectations, and strong economic growth,” it said.
The peso’s real effective exchange rate, which is now below its five-year moving average, implies the currency is trading at slightly below fair value, BMI said. Given the potential for valuations to mean-revert over time, this should act as a tailwind for the currency.
“Accordingly, we forecast the PHP to average PHP50.75/USD in 2018 and PHP50.37/USD in 2019, which should see the unit outperform the greenback, particularly in total return terms,” it said.
BMI said the Philippine economy, although beset by social and political instability, should continue to outperform with growth likely to average 6.2 percent over the next two years. Driving this will be demographic trends supporting savings, increased productivity due to the business environment and tax reforms, and government initiatives to invest in infrastructure development.
Deepening economic cooperation with China and Japan will also provide a tailwind for investment and trade over the coming quarters, it added.
“Given our bullish view on the peso, we believe that risks are tilted to the downside,” BMI said.
BMI, however, also said that President Rodrigo Duterte’s fixation on fighting illegal drugs, his volatile nature and continued bashing of the United States and the European Union had damaged the country’s international reputation and continued to risk alienating western investors.
“Lastly, the war against Islamic militants in the southern Philippines is a sign that terrorism may be gaining traction in the country, and could undermine social stability and growth prospects,” it noted.