Embattled peso, now one of the worst performer in South East-Asia, seeks relief as Philippines to weigh rate hike

MANILA (Bloomberg): A rebound in the dollar has hit the peso harder than most of its peers and the losses may get exacerbated if policymakers at the Philippine central bank hold interest rates this week.

With a 3.6% slide in August, the currency has already gone from Asia’s second-best performer to one of the worst in the region.

It will likely extend the losses from this year’s nadir if a pause by the Bangko Sentral ng Pilipinas on Thursday further widens the rate differential with the US.

"Should the central bank refrain from a rate hike, the peso will come under more pressure,” said Michael Ricafort, chief economist at Rizal Commercial Banking Corp., who is predicting an increase. "There’s a need to maintain the rate differentials with the US after the Federal Reserve’s move in July.”

The rate setters will need to balance the need to tame consumer prices and support the currency, which last week slid to the lowest since December, against stimulating the economy as growth weakens.

BSP has raised interest rates by 425 basis points since May last year to 6.25%, pushing borrowing costs to one of the highest in the region.

All 18 economists in a Bloomberg survey expect the central bank to stand pat at its policy meeting on Thursday. A hike will help arrest the currency’s decline and kickstart a 4% rally by the end of 2023, according to MUFG Bank Ltd.

"The recent sharp drop in the peso may be overdone,” said Michael Wan, an analyst at MUFG in Singapore. "Outsourcing, tourism and remittances will offset the trade deficit, and prevent a deterioration in the current-account deficit.”

EM Pressure

The peso, which slid 1.2% to 56.99 per dollar on Monday, may rebound to 54 by the end of the year, according to MUFG, Australia & New Zealand Banking Group Ltd., and Pantheon Macroeconomics Ltd. The currency was emerging Asia’s top performer after the rupiah in the first seven months of this year.

A cautionary tone from the central bank on the pitfalls of "too much” tightening is keeping peso bulls away for now. After signaling in July there’s room to raise rates again, Governor Eli Remolona this month tempered the hawkish view to avoid crimping economic growth as inflation eases to a 16-month low.

"There is concern over whether BSP will continue hiking,” said Brendan McKenna, a strategist at Wells Fargo & Co. in New York. "On top of that, China’s growth deceleration is creating volatility across emerging markets.”

The peso is not alone. Emerging-market currencies are set for their worst monthly drop since February as the dollar rebounded following growing optimism the US may avoid a recession and more Fed hikes.

"We expect a lot of volatility,” said Robert Dan Roces, chief economist at Security Bank Corp. in Manila. "But any more peso weakness may trigger the central bank to deploy its foreign-exchange reserves and draw a hard line.” - Bloomberg