The peso vis-à-vis the US dollar could stay below P57 as is apparently preferred by the central bank but market observers think there are conditions for this support that may affect the peso in the near term.
HSBC Global Research in a commentary Monday, Oct. 9, said the Nov. 16 rate increase that has been signaled by the Bangko Sentral ng Pilipinas (BSP) in recent days may do little for the peso too because of “flush liquidity conditions.”
Flush liquidity refers to banks' excess liquidity that are for the most part, parked with BSP's open market facilities to earn fixed interest rates.
“In our view, how markets approach the PHP (peso) remains unchanged, maintaining a long USD (US dollar) bias given the subdued front-end swap points and fundamental support for the USD, temporarily pivoting to a short USD bias upon signs of significant inflows, and re-establishing the long USD bias thereafter,” said HSBC.
On Monday, the peso opened at P56.75 and depreciated to an intra-day low of P56.93 versus Friday’s close of P56.62.
HSBC noted considerations that “may matter to investors” such as how long will the BSP support the peso at P57 and how will a rate increase affect the exchange rate.
The bank reiterated its previous commentary that the BSP’s defense of the peso will depend on a “no outsized outperformance” of the nominal effective exchange rate or NEER, which is a weighted average of bilateral exchange rates with the currencies of trading partners.
HSBC said the NEER is close to the mid-July level when the BSP bought US dollars to ease pressures off the peso. It also compared the BSP’s protection of the peso in the second quarter last year when the spot market was at P52.50.
“Currently, PHP NEER is 1-2.5% below the levels seen in 2Q22, but risks that the BSP may choose to defend at a higher level rise should PHP NEER continue to surge,” said HSBC.
Meanwhile, economists from the British bank said a BSP rate hike next month will do good for the peso.
“The intention to hike is well-telegraphed by the authority, starting to be priced in by markets, and coinciding with a stagflationary backdrop – generally not favoured by FX (foreign exchange) markets,” noted HSBC.
It also said that while “a hike in November should widen the policy rate advantage over the USD, the benefit may be dampened by flush liquidity conditions."
In addition, "both equity and debt-related portfolio inflows could be further deterred.” The $1.3 billion retail bond issuance is also smaller compared to previous case, it said.
HSBC said the country’s trade deficit will “unlikely” improve by end-2023. Thus, they “expect the PHP to only get a reprieve when services trade surplus and inward remittance pick up amid strong seasonality in October and December.”
“But even then, markets are likely to be keen to buy the dip in USD-PHP after strong inflows pass, unless the fundamental picture of USD strength and subdued carry changes,” it added.
BSP Governor Eli M. Remolona Jr. himself has said that they could maintain a below-P57 exchange rate for the next months.
In August, Remolona said BSP’s tightening bias is good for the peso-US dollar rate because it props up the local currency despite some volatility. The BSP’s key rate remains at 6.25 percent for the past four Monetary Board policy meetings in a row, but the BSP intends to go back to a hiking mode in November and possibly in December plus an off-cycle move.
The BSP 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.