A MIX of domestic and external factors weighed on the Philippine peso Friday, pressing it further against the US dollar to finish at a new low in more than 10 years.
The local currency closed 9 centavos weaker at P50.40:$1 on Friday, from P50.31 on Thursday. It was the peso’s weakest finish since settling at P50.43:$1 on September 12, 2006.
It opened at P50.34:$1 before trading between P50.31 and P50.40.
ING Bank Manila noted a cloud of uncertainty hang over Philippine politics, monetary leadership and fiscal performance on top of a higher probability of a Fed rate hike this month.
“Political uncertainties, including the uncertainty over the leadership in BSP after BSP Governor Tetangco leaves, possible repercussions from other countries to Congress’s passage of a death penalty law and to alleged human rights violations keep investors cautious,” said ING Bank Manila senior economist Joey Cuyegkeng.
Bangko Sentral ng Pilipinas Governor Amando Tetangco Jr. is set to retire on July 1 this year. So far, the Duterte administration has not made any announcement on who will replace him.
Cuyegkeng said market expectations of a larger fiscal deficit spending program this year would widen the trade deficit and possibly bring the current account to a deficit that underpins the strong demand for US dollars as companies hedge dollar liabilities or monthly requirements.
The government penciled in a 3 percent budget deficit-to-gross domestic product target in 2017 to 2018, compared with 2.4 percent in 2016.
“Market also expects monetary policy to remain steady in the very near-term. These considered the monetary tightening cycle in the US would lead to further weakness of the peso,” Cuyegkeng noted.
“A weak peso has modest impact on inflation. Stronger agriculture production would offset price pressures, not only resulting from a weaker peso but also other local price pressures,” he said.
A weak peso benefits US dollar earning sectors including exporters, overseas Filipino workers families and outsourcing. But it could also slow down import growth and bring about a more moderate deterioration of the trade deficit. “But before such adjustments to imports are made, the Philippine peso would likely remain under pressure,” Cuyegkeng said.
The peso is also growing weaker in line with other Asian currencies because of the high likelihood that the US Federal Reserve will hike policy rates by 25 basis points during the March 14 to 15 policy rate meeting.
“Perceived monetary doves who vote at this year’s United States Fed monetary policy meetings have joined the other hawks of a rate hike that is likely to be ‘appropriate soon’, which bolsters March rate hike expectations.
Chances of a rate hike at the March meeting has increased to 90 percent likelihood from last Friday’s 40 percent,” Cuyegkeng noted.
“We had earlier expected that technicals can bring the Philippine peso to new 10-year lows with a technical target of P50.67 in the near-term. A test of the psychological P50.50 is highly possible in the very near-term,” he said.
The peso first touched the P50:$1 level on November 24, 2016 as bets on an interest rate hikes in the US–which actually happened in December—favored the dollar. It depreciated by 5.35 percent against the US dollar last year.