This week the Philippine peso fell against the dollar to levels not seen since September 2006. Recent peso weakness, driven by a deterioration in the state of the Philippines’ current account, finally pushed USD/PHP above the 50.50 resistance level which had kept the exchange rate contained since February.
USD/PHP reached highs of 50.72 on Thursday but did offer holders of pesos some hope for the future when it ended the week back below resistance at 50.45.
“The current account remains the peso’s Achilles heel,” said Standard Chartered’s Asia strategist Divya Devesh on the ANC’s Market Edge program.
The Philippines, which used to enjoy a sizeable current account surplus, has seen its finances deteriorate significantly over the past year in the face of very strong imports.
Devesh told Market Edge that USD/PHP could rise (the peso could fall) as high as 52.50 in the next 12 months if the current account continues to decline.
Another part of the peso narrative is that which effects all emerging market currencies at present, namely the hawkishness of the world’s major central banks, which in the past three weeks has surprised investors.
On June 12th, Bank of Canada (BoC) Council member Carolyn Wilkins lit a fire under the Canadian dollar with her remarks to an audience at the Asper School of Business in which she hinted at a possible rate hike by the BoC. Wilkins said that “the Governing Council will be assessing whether the considerable monetary policy stimulus presently in place is still required.”
Wilkins’ comments began a trend of hawkish rhetoric by decision makers at central banks, which has included ECB president Mario Draghi talking up eurozone inflation, the Bank of England governor Mark Carney suggesting that rate hikes are possible in the UK, the Bank of Canada governor Stephen Poloz reaffirming Wilkins’ comments, as well as various moderately hawkish speeches by regional presidents of the Federal Reserve. Not to be left out, Australian markets were stirred last week by their own rate hike chatter when former RBA board member and renowned economist John Edwards said that as many as eight interest rate hikes by the RBA across 2018 and 2019 were “distinctly possible,” and that tightening of monetary policy could start earlier than markets were expecting.
This significant change in the stance of central bankers globally, many of whom were suggesting earlier in the year that rate cuts were still on the table, creates what Devesh describes as “a difficult trading environment for emerging market FX.” As interest earned on the currencies of developed, safer nations rises, the comparative risk-adjusted returns earned on emerging market currencies look less favourable, thereby weakening their valuations.
The Peso Disappoints
Hopes had been high in early June that the peso would appreciate on technical grounds.
Between November last year and June, the USD/PHP exchange rate had traced a fairly ‘textbook’ Head and Shoulders topping pattern on the daily price charts. Despite testing the pattern’s ‘neckline’ – a break of which would have indicated a significantly lower exchange rate ahead (significant peso strength) – this crucial technical level was never breached and was instead used as a launch pad for a further USD/PHP rally (further peso weakness).
The decline in the Philippines’ currency will also have surprised the global funds who piled into Philippine equities earlier in the year. A decision by US ratings agency Fitch to affirm its investment grade status for the Philippines appeared to be the catalyst for a 600 point rally in the PSEI equity index between April 1st and May 8th. The weaker peso ensures that any capital gains made by funds on such investments – gains which are unavoidably denominated in pesos – are now worth less than they were or might otherwise have been.
It should be especially disappointing for Filipinos that their currency is declining against the US dollar of all currencies, which itself has suffered heavily due to a reversal of last year’s ‘Trumpflation’ trade. At the end of trading yesterday (the end of June), the dollar locked in its worst quarterly performance in nearly seven years but still managed to gain 0.6% against the peso. By comparison, the peso’s regional peers, including the Singapore dollar, Thai baht and Malaysian ringgit, were all comfortably higher against the dollar on the quarter, as was the Chinese yuan. Although the Indian rupee and Indonesian rupiah were little changed in Q2, neither fell against USD.
Against the euro and Australian dollar, the peso fell this week to 57.68 and 38.85 respectively – prices which also mark multi-year lows in peso buying power.
In terms of historical valuations, since 2000, against the US dollar the peso was weakest in April 2004 when USD/PHP reached 57.72. The currency was strongest in February 2008 when USD/PHP fell to 40.15. Peso strength also pushed USD/PHP into the 40s in early 2013.
The Upside to Peso Weakness
This should be obvious. The Philippines is a wonderful place to holiday, retire or have a second home. It’s also a source of cheap manufacturing for many western businesses. An extremely cheap peso means, simply, that all of the above are currently on sale, so get them while you can!
Readers can change money into or from Philippine pesos at exchange rates far better than those available at the high street bank or airport money changer by using BestExchangeRates’ online comparison calculators for PHP travel cash and PHP foreign currency transfers.