Peso not seen breaching P57:$1

The financial market is more confident that the peso has stronger support below P57 to the US dollar and will not breach this level, according to analysts.

“With the BSP’s (Bangko Sentral ng Pilipinas) intervention, the peso-dollar rate may not go far beyond P57/$1, if at all, despite the yawning trade imbalance,” said analysts from Metrobank subsidiary First Metro Investment Corp.

On Friday, the peso opened strong at P56.6 versus P56.73 closing rate last Oct. 31. The strongest intraday level was P56.

The most recent messaging from BSP Governor Eli M. Remolona Jr. as far as the spot market is concerned is his continued relaxed view on the peso.

Remolona said last week that they are not intervening much in the exchange rate market but is closely watching the peso movement. He said previously that they could comfortably keep the peso at current levels for some time.

HSBC analysts said the peso has lately been dealing with the effects of a strong US dollar as US yields also remain high, but it has observed the BSP’s support as well.

“Although the PHP (Philippine peso) hasn't depreciated as much as many other currencies y-t-d (year-to-date), the HSBC FX (foreign exchange) team flagged that the BSP has been defending the USD-PHP from breaching 57 since mid-August; the USD-PHP hasn't budged out the 56.5-57.0 range since then,” said analysts from the British bank.

HSBC also noted that the increase in US growth for the third quarter of 4.9 percent, which exceeded expectations, could have put pressures on the peso. “To pre-empt this, we think the BSP hiked its policy rate in an off-cycle move (Oct. 26) before the US growth data comes out,” it said. The US growth data was released Oct. 27 (Philippine time).

Meanwhile, analysts from Bank of the Philippine Islands (BPI) said that in case the peso depreciates past P57 and will move closer to the P58 level, the BSP’s Monetary Board will likely consider another rate hike after its 25 basis points (bps) off-cycle increase last Oct. 26.

“Depreciation pressure on the peso may persist as market players weigh substantial imports, global financial market developments, and the central banks’ future policy move,” said BPI. It also noted that remittances during the holidays “may offset some of the pressure on the local currency.”

But, BPI analysts added, “the behavior of the local currency in 2023 may largely depend on what the Federal Reserve will do. Once the Fed is done hiking, the peso may strengthen as markets will likely assess the possibility of rate cuts. If a recession in the US happens, the Fed may cut its rates and the BSP will likely follow. But in this situation, the appreciation of the local currency will likely be smaller compared to other currencies given the still substantial current account deficit of the Philippines this year and in 2024."

Remolona’s forward guidance for the policy rate and to some extent the exchange rate is an assurance that the BSP could maintain a below-P57 exchange rate.

In August, the BSP chief said a tightening bias is good for the peso-US dollar rate because it props up the local currency despite some volatility.

After the recent off-cycle rate hike, he BSP’s key rate is currently at 6.5 percent after lounging at 6.25 percent for the past four Monetary Board policy meetings in a row.

The BSP has always emphasized that it has a flexible and free-floating exchange rate policy, which means it is market-determined. However, it is prepared to participate in the exchange rate market to ensure orderly market conditions and to reduce excessive short-term volatility.