The peso slipped Friday to its lowest level (intra-day) of P50.17 vis-à-vis the US dollar in over a year, from the previous day’s P49.87 before closing to P50.08 as pressure from an improving import bill continues.
The last intra-day softening past P50 was on June 23, 2020 when the peso hit a low of P50.25, while the last peso closing at P50 was on June 25, 2020.
Based on the Bankers Association of the Philippines (BAP) spot market, the exchange rate total volume dropped to P859.7 million from Thursday’s P1.127 billion.
ING Bank economist Nicholas Mapa said the country’s trade deficit was bigger than anticipated and it is “heaping more pressure” on the local currency which has been performing poorly this past month against the US dollar.
Mapa said a strong dollar with “the wider-than-expected trade gap may have helped push peso past the P50 psychological handle on Friday with the currency now down 1.94 percent” for July, so far.
Two weeks ago, the peso was just at P47 and now it is back at P50 and the market expect a test to P51 soon.
Mapa also noted in a commentary that since the Bangko Sentral ng Pilipinas (BSP) is not yet concerned about the depreciating peso, this should mean that the BSP “will likely withhold resorting to costly policy rate hikes to help stem the depreciation trend however we could see BSP changing its tune should the current weakness go on for a considerable period of time.”
“In the near term, we expect BSP to stick to its accommodative stance given that the economic recovery is still in its nascent stages as import levels, although rising, are still below pre-COVID levels. Meanwhile, we expect continued pressure on (the peso) in the near term as import demand accelerates especially if exports remain hampered by shipping bottlenecks,” he added.
In another commentary, the research unit of Bank of the Philippine Islands (BPI) said they too expect the peso to further weaken with the recovery of imports in the months ahead.
Any news coming from the US Federal Reserve’s “hawkish tilt” is another pressure on the peso since the tapering of US bond purchases which could start next year will result to dollar withdrawals from the BSP’s reserves. “The Federal Reserve might announce in the coming months how it will unwind its bond purchases, thereby exerting additional pressure on the peso,” said BPI.
In addition, the government is expected to ease lockdown measures to open up more of the economy as they gain more confidence in the vaccine roll out and plateauing of COVID cases.
“We expect a rebound in imports as a result of the reopening. Dollar demand may pick up and the exchange rate may move closer to revisit the P50 level, even if just briefly, later this year,” said BPI. “The possibility of tighter dollar supply may contribute further to peso depreciation.”
On Thursday, BSP Governor Benjamin E. Diokno said he is not overly worried about the peso moving past P50, that this was a case of “it’s the dollar not the peso” because the US dollar happens to be really strong in recent weeks. “Almost all major currencies in the world depreciated vis-à-vis the dollar. That means that it is the dollar that is strong, not the peso that is weak,” he said. He also said the BSP could defend the peso from speculative attacks with its $107 billion war chest.
Two days before, Diokno also noted that the peso will continue to reflect “emerging demand and supply conditions in the foreign exchange market as well as external developments, including increasing availability of anti-COVID vaccines, recovery of remittances, foreign investment inflows, and exports rebound as world economic conditions improve.”
Last year, the peso closed at P48.02, appreciating by 5.44 percent from its closing rate of P50.64 in December 2019.
The BSP has a flexible exchange rate system and it relies on a set of measures to cushion the impact of sharp peso movements such as maintaining adequate foreign exchange reserves, reviewing and calibrating existing macro-prudential measures.