The peso lost more ground on Thursday, July 7, and fell to a new 17-year low of P56.06 versus the strong US dollar.
Since Friday, July 1, the peso has depreciated by 97 centavos or by 1.76 percent in just five trading days. The previous close was P55.67 on Wednesday, based on the Bankers Association of the Philippines’ (BAP) spot market data.
From its end-2021 close of P50.99, the local currency’s value has fallen by P5.07 or 9.94 percent.
BDO Unibank Inc.’s Senior Vice President for trust and investments group, Frederico Ocampo, said the wider current account deficit and more aggressive US Federal Reserve interest rate hikes are wreaking havoc on the peso.
“The peso is trending towards P56.45 per USD (US dollar), the highest level for the local currency. There is also increased corporate demand due to the import season,” Ocampo told Manila Bulletin. As of end-March, the current account deficit was at $4.8 billion, up from same period last year of only $32 million due to the widening of the trade in goods deficit and the slight decline in net receipts in services.
Bank of the Philippine Islands (BPI) Treasurer, Dino Gasmen, said a similar thing, that the peso “is being pressured due to overall USD strength against almost all currencies as the US Federal Reserve Bank embarked on its interest rate hike cycle.”
The last time the peso was at the P56-level was in September 2005 at P56.28. The lowest currency level was in 2004 during the Arroyo administration when the peso depreciated to P56.45. At the time, the world was also grappling with rising prices and inflation which resulted to central banks tightening policies to control price pressures.
On Thursday, the peso hit an intraday high of P56.09 even as it regained some strength at P55.78. Trading volume reached $1.114 billion.
The peso was also reacting to sharp inflation increases and the recent announcement by Bangko Sentral ng Pilipinas (BSP) Governor Felipe M. Medalla that another 100 basis points (bps) increase to the benchmark rate is possible.
Medalla’s forward guidance was made after the government released the June inflation data of 6.1 percent, up from 5.4 percent from May. The last time the inflation was at the six-percent level was in September and October 2018.
With BSP poised to hike rates by another 100 bps, this will bring the policy rate to 3.5 percent by the end of the year, from the current 2.5 percent. The BSP’s policy-making body, the Monetary Board, has clocked in two 25 bps increase, last May 19 and June 23. The next four of eight policy meetings are on Aug. 18, Sept. 22, Nov. 17 and Dec. 15.
The strong US dollar has caused the peso to sharply depreciate last month. It fell to P53 on June 10, P54 on June 17, and then again to P55 last June 29.
Medalla over the weekend, after the peso closed at P55.09 on July 1, said that so far, the BSP is not detecting any speculative play on the local currency.
Medalla noted though that corporates that have maturing foreign exchange obligations are buying ahead of their needs. He also said that importers who have excess pesos or can borrow are likely to buy earlier than normal the dollars that they need for their imports.
While the exchange rate is market-determined, the BSP has the ammunition to intervene and to participate via other monetary measures to prevent major exchange rate volatility.
The central bank currently implements a Currency Rate Protection Program (CRPP) which the BSP reactivated in 2018 when the peso was depreciating due to inflation worries. The CRPP facility is a non-deliverable US dollar-peso forward contract between the BSP and big banks to “help relieve the pressure on the foreign exchange market created by corporate clients wanting to front load their future foreign currency requirements.”
The country’s exchange rate policy supports a freely floating exchange rate system where the BSP leaves it to market forces to dictate the exchange rate level. The BSP will only enter the spot market to ensure “order and temper destabilizing swings” in the peso-US dollar rate.
Speculative attacks on currencies occur when there is excessive, large volume of foreign exchange selling in the hope that the central bank will run out of reserves and thus a currency crisis ensue, and speculators with a foreign currency hoard will be able to dictate market price.
Medalla told reporters last last week that they are only interested in the peso rate if it is affecting inflation already.