The Philippine peso was best in Asia last week and continues to defy pessimistic forecasts from earlier in the year.
USD/PHP’s move to 49.99 on Friday was the pair’s first journey through the psychologically important rate of 50 since June, and a 3.2% appreciation in the peso’s value since November 1st places it second only to the South Korean won in the list of Asia’s best recent performers.
In September, with the dollar buying a little more than 51 pesos, 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 its value to 53 per dollar by year-end. With Wisniewski’s prediction, Alpari aligned itself with Standard Chartered, Natixis and Macquarie who each predicted fourth-quarter peso weakness with forecasts ranging between 52 and 52.5 per dollar. All were proven wrong.
Analysts and traders have perhaps been surprised by the speed at which the Tax Reform for Acceleration and Inclusion bill is being passed into law. The bill is a cornerstone of the Philippine government’s plan to raise the necessary funds for President Duterte’s massive infrastructure projects and was attributed last week as the cause of the peso’s recent buoyancy by Union Bank of the Philippines’ chief economist Ruben Carlo Asuncion. The peso’s 0.8% gain against the dollar last week was the “off-shoot of the optimism brought by the tax reform passage,” said Asuncion.
Looking ahead, peso-pessimism remains however. In a survey of FX analysts conducted by Bloomberg last week, the median estimate for USD/PHP for 2018 year-end was 51, with the most bearish of analysts predicting a move to 56 – a rate unseen since 2005. Surveyed analysts also expected the peso to be 2018’s worst performing Asian currency.
Dollar Down; US Tax Cuts Likely Priced In
The US Dollar Index – a measure of the dollar’s performance against a basket of currencies – had its worst week in four as investors pulled billions out of US assets, likely signalling that the Trump administration’s economy-boosting tax cuts are now fully priced in.
Bank of America Merrill Lynch report that US equity fund withdrawals totalled $14.5 billion last week – the fourth largest withdrawal on record – and US bond funds suffered their largest withdrawals in more than a year, at $3.2 billion. Traders withdrew from funds that had previously been supported as part of the “Trump Trade.”
The Dollar Index declined to 93.32, from 93.93 a week earlier, and the US currency fell in value against all but one of the other seven FX majors.
Exceptional volatility remains the norm in Bitcoin. The remarkable cryptocurrency fell nearly 30% in just fifteen hours on Friday to $11,159, having settled one week earlier at levels close to $19,000. Bitcoin had recovered, as of writing, to levels above $15,000 but continues to require heart stabilizing medication for those trading it. The New York Times reported on Friday that users of Reddit – a forum popular with Bitcoin followers – had began posting suicide hotline numbers for grieving investors!
The Week Ahead
Needless to say, with Christmas and the New Year looming, foreign exchange markets will be characterized in the coming fortnight by illiquidity, low volumes and, barring major surprises, mean-reverting price action.
On next week’s economic calendar, we see Japanese inflation data (Tuesday), US consumer confidence (Wednesday), US jobless claims (Thursday) and preliminary German inflation data (Friday); none of which is expected to significantly impact FX rates.
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