The Bangko Sentral ng Pilipinas (BSP) has not been intervening or influencing the exchange rate market recently and they do not expect to do so as they turn less hawkish and even after signaling that they will cut the policy rate ahead of the US Federal Reserve, according to its highest-ranking official.
BSP Governor Eli M. Remolona Jr. said that while being less hawkish may put pressure on the peso vis-à-vis the US dollar, he said that “so far it hasn’t.”
He told Bloomberg TV in an interview Friday, May 17, that “we were happy with the movement of the peso but if there’s stress then we might come in.” He is referring to the exchange rate level on Thursday, when they decided as expected to keep the policy rate intact at 6.5 percent.
Remolona clarified that stress means large offer sizes and high volatility.
“We have been intervening (recently) but in small amounts, not to really affect the volume of the peso but to keep markets orderly,” he explained.
The BSP chief also reiterated that it has been a broadly strong US dollar all along, for the past several weeks. “We don’t feel obliged to intervene but we want to keep the market orderly,” he said.
Remolona said the BSP, which has a free-floating exchange rate policy, does not have a specific target for the peso rate. “But we worry stress and it hasn’t happened yet in the last few months,” he added.
Remolona also said that anything or any event will impact on the peso, including the Philippine and China row over the South China Sea.
“Any incident seems to affect the peso a bit,” he noted. But the Philippine-China maritime disputes have not had any “sharp” impact on the exchange rate yet.
“None at all, the (Philippine-China) incident has not affected the peso,” he said.
Meanwhile, HSBC’s Global FX Strategist Lenny Jin in a commentary Friday said they recommend a “sell on rally” stance for the peso. Earlier, they recommended a buy when the peso broke past P57.
“First, we expect 58 to be forcefully defended by the BSP and upside in spot rates is therefore limited, in line with the BSP’s hawkish tone when USD-PHP approached 58 on 25 April,” said Jin.
She noted that the local currency’s nominal effective exchange rate or NEER, which is a weighted average of bilateral exchange rates with the currencies of trading partners, has weakened to its lowest level since August last year when the BSP rallied behind the peso to prevent it from breaching P57.
Jin said the peso “underperformance, despite having one of the strongest growth stories and one of the highest rate levels in Asia, may be seen by the BSP as deviating from fundamentals, which typically triggers intervention.”
“The BSP maintains one of the best track records of defending the currency resolutely and has ample reserves at its disposal. We think markets will have limited appetite to challenge the central bank once they sense a forceful defense,” she added.
HSBC recommends a sell on the peso due to other reasons such as: risks are now clearly skewed towards a more hawkish stance by the BSP, over time; markets may position for some US dollar bond issuance proceeds to be converted back to the peso; remittance inflows may pick up seasonally; and the US dollar upside may be harder to come by, which may help to temper the recent rise in FX deposits.