The peso tumbled to a fresh record low on Tuesday, April 28, breaching the 61-level as a resurgent United States (US) dollar and the broad exodus from emerging-market assets overwhelmed the central bank’s recent efforts to shore up the currency through tighter monetary policy.
The peso plunged to a new historic-low close of ₱61.3 against the US dollar, shedding a hefty 59 centavos from ₱60.71 last Monday, April 27.
Tuesday’s closing rate was also the local currency’s intraday low, while it reached a high of ₱60.77 after opening at ₱60.8. Total trading volume jumped to $1.75 billion from Monday’s $1.41 billion, according to the Bankers Association of the Philippines (BAP).
Before the latest drop, the peso’s previous record-low close was at ₱60.748:$1 last March 31.
SM Investments Corp. (SMIC) Group economist Robert Dan Roces said the breach of the 61-level should not be viewed as a failure of the central bank’s hawkish stance.
Last week, the BSP finally decided to deliver a 25-basis-point (bps) hike to 4.5 percent as inflation expectations are confronted with the risks of deanchoring.
Roces explained that while the rate hike provided some stabilization, the peso is grappling with a formidable combination of high US interest rates and steady domestic demand for dollars from importers.
“It helped, but stronger forces are at work,” said Roces. “US rates are still high, the dollar is strong, and money is moving out of emerging markets.”
Explaining the ongoing trend for the peso, Roces said this is because the foreign exchange (forex) market is looking at “where rates are headed, not just the last move, and may still be seeing a narrow gap with the US.”
“The peso’s weakness is driven more by global factors, and the hike likely slowed the drop rather than reversed it,” the economist added.
Aris Dacanay, an HSBC economist for the Association of Southeast Asian Nations (ASEAN), told reporters during an April 28 roundtable with the media that the peso’s touch to another record low is driven by the US dollar, a development also evident in the decline across other Asian currencies.
“There’s no magic number [with which the BSP could begin defending]. Our policy is that the exchange rate should be driven by market forces—wherever the market takes it,” Dacanay said, explaining that overly defending the peso would prompt the market to stop hedging their forex risk, a behavior that raises financial risk in the economy.
“The idea is to be more open to exchange rate volatility—as long as it isn’t too sharp. Sudden, sharp movements tend to have asymmetric effects [on inflation]. As long as movements are market-driven, and the pace and direction of volatility are well managed, that would be the appropriate policy stance,” he added.
He further noted that firms were already expecting a 61-level forex rate, translating to higher market prices now.
Singapore-based Oversea-Chinese Banking Corp. Ltd. (OCBC) said the Philippine peso and Thai baht could stay pressured as the Strait of Hormuz impasse keeps oil prices elevated.