Peso weakness temporary — BSP

Published July 29, 2021, 6:40 PM

by Lee C. Chipongian

Bangko Sentral ng Pilipinas (BSP) Governor Benjamin E. Diokno said the depreciating peso versus the US dollar is expected and only mirrors the demand and supply conditions in the foreign exchange (FX) market.

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The peso on Thursday closed at P50.30:$1 from P50.37 of the previous day. The peso has depreciated by P2.28 from the end December 2020 closing rate of P48.02.

“The recent movements of the peso (are) reflective of shifts in demand and supply conditions in the FX market, as well as emerging external and domestic developments,” said Diokno during his weekly online press chat. These factors are short-term influences and will not affect the local currency’s long-term fundamentals.

“In the last month or so, there have been some depreciation pressures on the peso, reflecting broad dollar strength driven by risk-off sentiment due to worries over the potential spread of the more contagious Delta COVID-19 variant and the shift to a hawkish tone by the US Fed. In addition, corporate dollar demand has increased as the economy gradually recovers,” he further explained.

Diokno pointed out that the peso is not alone in its depreciating trend. “Let me make this crystal clear: the peso is not the only currency that has depreciated against the US dollar on a year-to-date basis. The reality is that the peso depreciation has been broadly in line with regional peers,” he stressed.

Diokno said adding pressure to the peso is the pick-up in corporate dollar demand with the gradual re-opening of the economy, as well as debt watcher Fitch Ratings’ outlook downgrade for the Philippines sovereign credit rating this month.

He said that regional currencies have also depreciated against the strong US dollar with the US monetary policy normalization.

“While short-run fluctuations in the peso are affected by market sentiment, its medium- to long-term movements are largely supported by economic fundamentals as indicated by the relative stability in the movement of the real effective exchange rate of the peso,” said Diokno.

The peso is supported by structural FX flows such as overseas Filipino remittances, business process outsourcing receipts and additional dollar sources when the tourism sector is fully reopened. “Furthermore, FX inflows related to foreign direct investments are also expected to help shore up the currency,” said Diokno.

Diokno also said they will stick to a flexible exchange rate arrangement which is “an automatic stabilizer in the face of external shocks.”

“A market-determined exchange rate has the benefit of reducing the negative impact of external shocks as a floating exchange rate can appreciate or depreciate immediately to stabilize the country’s balance of payments,” he added.

 
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