The weak peso hit a 44-month low of P54 to the US dollar on Monday, June 20, on continued greenback strength and in anticipation of a central bank rate hike this week of as much as 50 basis points (bps).
The local currency closed at P54.065 from Friday’s P53.75. It hit an intra day high of P54.105 on Monday. The last time the peso was at the P54-level was Oct. 15, 2018.
Based on Bankers Association of Philippines data, the spot market’s weighted average for the peso was at P54.005 while the exchange rate volume reached $1.015 billion versus $962 million on June 17.
The peso only broke past P53-level last June 10. On that day, incoming Bangko Sentral ng Pilipinas (BSP) governor, currently Monetary Board member Felipe M. Medalla, said the peso is not a weak currency, it is just that the US dollar is too strong.
A US policy normalization favors the US dollar. Last Wednesday, the US Federal Reserve raised its key rates anew by 75 basis points (bps).
Meantime, the exchange rate market is anticipating a similar rate hike from the BSP on Thursday, June 23, when the Monetary Board meets for its next policy decision. Medalla and outgoing BSP chief, Benjamin E. Diokno, both signalled another 25 bps rate increase this week, following the US Fed rate hike. This is the second time in a row that BSP will adjust its rate higher from May 19.
The market was not expecting the peso to hit P54 this year. Most analysts predicted only P53.50 as of last month. However, the ongoing Russia-Ukraine war, the rising oil and non-oil prices and the monetary policy rate adjustments across the globe are weakening the local currency.
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.
The BSP intervenes in the peso-US dollar spot market by releasing 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 now, BSP’s policy of a flexible or free-floating exchange rate versus a fixed exchange rate helps protect the peso against speculative attacks.