On Thursday, the central bank of the Philippines, Bangko Sentral ng Pilipinas, maintained what many analysts consider to be a dovish stance by leaving interest rates on hold at a record low of 3.0% and by expressing no discomfort with a national currency that has fallen to its weakest levels since 2006.
In the hours following the Bangko Sentral’s meeting, with the dollar fetching 51 pesos, give or take, Alpari Research’s chief analyst, Thomasz Wisniewski, told ANC’s Market Edge program that future peso weakness was a “sure bet” and predicted a fall in the peso (a rise in USD/PHP) to 53.0 by year-end.
“Going against the peso right now is kind of a sure bet on the market. We have a clash of two central banks and we all know that central bank policy is the most important in terms of currencies. [On the one had] we have a hawkish Fed and [on the other] an extremely dovish central bank of the Philippines. For now, we don’t have any signals whatsoever that this should reverse…from the fundamental or technical point of view. [Peso weakness] seems sustainable,” explains Wisniewski.
Looking ahead, “our target for the end of the year is 53 pesos for 1 dollar,” said the analyst.
Wisniewski’s call on the peso is by far the gloomiest seen by BER this year.
While analysts from Standard Chartered, Natixis and Macquarie have all recently predicted the peso to fall further, they do so over a far longer time horizon. Standard Chartered, for example, predicted USD/PHP at 52.5 by mid-2018. Wisniewski’s prediction allows just fourteen weeks for the peso to fall to an even weaker level.
The Philippine Peso: Asia’s Weakest Currency
The Philippine peso has, by a clear margin, been Asia’s worst performing currency of 2017, having weakened 14.4% against the euro, 11.5% against the Australian dollar, 10.2% against the Thai baht, 9.4% against the Singapore dollar and, not to be left out, by 2.7% against the US dollar.
It may be noted that the peso’s year-to-date performance against the US dollar – against which a currency is usually first judged – isn’t too bad. However, this is a reflection of the US dollar’s own disastrous year, and little should be read into this.
In fact, of the thirty most actively traded world currencies – a list which includes currencies as obscure as the Israeli shekel, Hungarian forint and the Saudi Arabian riyal – the Philippine peso is one of only two, together with the Hong Kong dollar, to make a loss against the US dollar this year. And the Hong Kong dollar barely counts, since it is pegged to USD by the Hong Kong Monetary Authority and trades within an extremely narrow 0.1% range.
The peso’s fall has been largely attributed to a marked deterioration in the Philippines’ current account. A once sizeable current account surplus has turned into a deficit for the first time in fifteen years. The deficit is expected to be USD 600 million in 2017 but will likely balloon to levels above USD 1.5 billion in 2018.
The peso is yet to bother central bankers though. In late August, when USD/PHP was trading at levels similar to Thursday’s, Bangko Sentral Governor Nestor Espenilla told journalists that the peso was “under control” and “consistent [with the bank’s] investment and export led strategy.”
“Definitely we are not in a foreign exchange crisis,” the Governor added.
It is unlikely that the Bangko Sentral will act on interest rates, and thereby act to support the peso, until inflation is seen moving towards the upper end of the bank’s 2-4% target band. Inflation has so far averaged 3.1% in 2017.