The market is seeing signs that the Bangko Sentral ng Pilipinas (BSP) will not let the peso-US dollar exchange rate breach P57.

In a commentary, HSBC Global Research said the “defense” of the peso continues at P57 or below “but with conditions.”

Bank of the Philippine Islands (BPI) in its own view , said the peso “may move sideways for now as market players weigh substantial imports, global financial market developments, and the central banks’ future policy move.”

At the trading Monday, Sept. 11, data from the Bankers Association of the Philippines (BAP) showed the peso opening at P56.63, stronger than Friday’s opening of P56.74. The peso appreciated to P56.63 on Sept. 8.

HSBC said the BSP will likely cap the exchange rate at below P57. The sentiment echoed what BSP Governor Eli M. Remolona himself said, that they could maintain a below-P57 exchange rate for the next months. This was Relomona’s clearest forward guidance in as far as the peso is concerned.

The British bank has noted that the exchange rate has been forming a relatively narrow range in past weeks, or within the P56.50 to P57 range.

“We see broad USD (US dollar) strength into the end of 2024 and elevated near-term pressure on every Asian currency, including the PHP (peso). The question is whether the BSP will still hold its defence at 57 should our broad USD view materialise,” said HSBC.

For now, the bank said “we think so (BSP support at P57) and we expect USD-PHP to stay around 57 over our forecast horizon (as this) view is linked to the BSP’s hawkish rhetoric, the latest beat in monthly inflation, and further upside risks.”

The BSP’s support of the peso “will be conditioned on no significant strength in PHP NEER. If the BSP defends 57 while currencies of the Philippines’ key trading partners (ex. US) weaken, we are likely to see a higher PHP NEER, which may not be desired by the BSP when the exports sector still faces headwinds,” said HSBC.

HSBC added that for now, this is not yet a notable concern.

Since 2013, the BSP has been analyzing the competitiveness of the peso based on three indices which measure the nominal and real effective exchange rates of the peso relative to the currencies of all major trading partners.

One of the effective exchange rates that BSP uses is the nominal effective exchange rate or NEER which is a weighted average of bilateral exchange rates with the currencies of trading partners.

An increase in the NEER index would mean that, on average, fewer pesos are needed to purchase a unit of foreign currency while a decrease would mean otherwise, said the BSP.

HSBC said the NEER is currently two percent to three percent stronger than levels seen in October 2022, when the BSP sold the US dollars to smooth the peso’s decline when it nearly breached P60.

However, HSBC noted that the NEER is 1.5 percent to two percent weaker than levels in mid-July this year, when the BSP was buying US dollars to "smoothen" the peso’s appreciation.

“PHP NEER is in the middle of the smoothing range, which suggests to us that the defence at 57 will continue perhaps until we see another 1.5-2% strength in PHP NEER,” noted HSBC.

“More broadly, USD strength and limited improvement in sight for the Philippines’ trade deficit mean that the PHP will only find periodical reprieve when the funding sources of its trade deficit – services surplus, remittance inflows, FDI, and portfolio inflows – strengthen. For this reason, our forecasts also do not reflect any sustained decline in USD-PHP for now,” added HSBC.

BPI, on the other hand, has a more broad strokes peso outlook and did not go into detail, other than to note the sideways movement of the peso.

“But 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,” said BPI.

The Ayala-led bank said that if a recession in the US happens, then the US 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.”

Policy rate actions have an impact on the exchange rate. A cut in rate can lead to a weak peso, for example, while a rate hike could do the opposite. A peso depreciation can also directly affect inflation since it will increase the price of imported commodities.

Last Aug. 22, 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 three Monetary Board policy meetings in a row, but the BSP always signals its hawkish stance.

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.

At the P56 level, the BSP considers the peso movement as stable because it moves in both direction, either to appreciate or become stronger than the greenback, or it depreciates or closing weaker versus the US dollar at the end of the trading day. The BSP call this a normal exchange rate day, driven by business operations.