Incoming central bank governor Felipe M. Medalla said the peso is not fragile or even vulnerable at P53 to the US dollar.
“It’s a strong dollar, not a weak peso,” Medalla who is a Monetary Board member since 2011, told Manila Bulletin. He takes over the Bangko Sentral ng Pilipinas (BSP) as its sixth governor on July 1.
The peso depreciated to the P53-level on Friday due to the US dollar strength as investors were on a risk-off sentiment ahead of the US Federal Reserve’s policy meeting on June 16 where it is expected to act on a 50-basis point (bp) rate hike.
BDO Unibank Inc. said the peso has been slowly depreciating for the third straight week on account of the US Fed’s expected hawkish policy action which is favoring the US dollar. “The week's close at 53.000 signals resumption of the dollar uptrend. A sustained break above the 53.000 will signal the assault of the 53.500 levels. Watch this space,” said BDO.
The peso slid to a 42-month low against the greenback on June 10, from P52.95 the day before. The last time the peso was at the P53-level was on Dec. 20, 2018 when the exchange rate was at P53.10. The peak in intraday level was Jan. 22, 2019 at P53.04. The peso has lost 3.94 percent or P2 vis-à-vis the US dollar from end-2021 close of P50.99.
Market analysts such as those from HSBC expect the peso to close the year on average at P53.50 vis-à-vis the US dollar.
Bank of the Philippine Islands (BPI) said the peso will depreciate further in the next months due to a widening trade deficit on account of a surge in import demand and the narrowing gap between US and local interest rates.
To stabilize and temper a depreciating peso and contain rising inflation expectations, the Monetary Board has started its rate hike last May 19, wherein both Medalla and outgoing BSP Governor Benjamin E. Diokno signalled that two more 25 bps rate adjustments will be coming on June 23 and Aug. 18 policy meetings. This will bring the benchmark rate to 2.75 percent by August from 2.25 percent.
Most analysts including from BPI and HSBC expect the policy rate to close 2022 at 3.25 percent after being on-hold at two percent since Nov. 18, 2020. This means the Monetary Board, after the release of the second and third quarter GDP reports, may still raise the key rate on Nov. 17 and Dec. 15.
At P53, the peso is already at the top range of the P48 to P53 inter-agency Development Budget Coordination Committee (DBCC) exchange rate assumptions for 2022 and 2023. The exchange rate assumptions are forecasts and not peso targets. The BSP allows the market to dictate the level of exchange rate based on market fundamentals and on the demand and the supply of US dollars.
When asked if the DBCC will modify the high end of the exchange rate assumptions after the peso breached the P53 level last Friday, Medalla said this will be a premature move.
“It’s too early to say that the exchange rate assumptions for 2022 and 2023 will be adjusted,” he said. “The DBCC assumptions are for making projections of the government’s revenue and expenditures. They are not targets,” Medalla added. The last review of the DBCC exchange rate assumptions was on May 24.
Based on the BSP Monetary Policy Report, the latest exchange rate outlook remains “broadly in line” with the DBCC’s assumptions of P48 to P53.
The central bank’s projected exchange rate path, which is not disclosed to the public as it is an internal guidance, continued to reflect the depreciating peso and the US Fed’s faster-than-anticipated tightening of a cumulative of 250 basis points (bps) rate hikes this year and another 50 bps increase in 2023, according to the report.
When the spot market is highly speculative, the BSP will use its monetary policy tools to absorb any short-term volatility, including foreign exchange market participation.
For now, BSP’s policy of a flexible or free-floating exchange rate versus a fixed exchange rate helps protect the peso against speculative attacks.
The BSP has been supporting the peso since January of this year. By end-March, the BSP may have sold over $2.5 billion of foreign exchange in the spot market to ease exchange rate pressures. The peso fell to a 30-month low of P52 last March 7.
When the BSP intervenes in the peso-US dollar spot market, it releases foreign currency to relieve the pressure off the peso. This kind of intervention is a way of effectively tightening monetary policy by mopping up the peso equivalent of the US dollar it is releasing.
For example, by selling over $2.5 billion in the spot market, the BSP actually siphoned off some P130 billion, an additional mopping up operation to complement the BSP’s other open market operations such as its reverse repurchase facility and the weekly auctions of term deposit and securities facilities.