Peso continues to gain vs dollar

The peso continued to strengthen against the dollar yesterday, rising by seven centavos to settle at 54.755 from Tuesday’s close of 54.825 to the dollar as corporate demand for the greenback eased slightly.

But foreign banks are concerned over the possibility that the Bangko Sentral ng Pilipinas (BSP) will increase its policy rates to protect the peso from weakening further, saying that this tact has failed to work in the past and is likely to fail again.

The Hongkong and Shanghai Banking Corp. (HSBC) said the peso would likely close at 54.50 at the end of the year and average at 53.71 to the dollar for the whole of 2003 provided there are no "dramatically unexpected events" for the remainder of the year.

The BSP has so far been able to maintain its policy rates but has already scrapped its tiering structure for bank placements in an attempt to mop up liquidity and ease the inflationary impact of the peso depreciation.

At the Philippine Dealing System (PDS) yesterday, the peso opened strong at 54.840 before hitting a high of 54.720 and a low of 54.845 to the dollar. Total volume traded amounted to $127 million on an average rate of 54.785 to $1.

The peso has managed to gain against the dollar, but banks said the threat of an adjustment in the BSP’s key policy rates still exists especially if another unforeseen event causes more disruption in the local market as it draws closer to next year’s elections.

HSBC treasurer John McGowan said there are concerns that the BSP may hike rates to protect the peso.

"Hypothetically if the peso depreciates a lot, there might be an increase in interest rates," McGowan said.

McGowan said the peso should stabilize from hereon, assuming there would be no more shocks and as long as the National Government would manage to stay within its fiscal targets, especially the deficit.

"There are early indications that the August target would be missed but even so, it is very likely that the government would be well within its target for the whole year," he said.

Beyond the foreign exchange rate, however, McGowan said investors’ attitude towards the Philippines was surprisingly resilient, indicated by the narrowing of the spreads between ROP (Republic of the Philippines) bonds and US treasuries.

"One gray area is the performance of ROP bonds, not just in terms of price but also in terms of spread over US treasuries," McGowan said.

McGowan said the spreads have gone down by almost 190 basis points over US treasuries for the most heavily traded ROP bonds, especially those maturing in 2009 where spreads are down by 188 basis points compared to December 2002 spreads.

The spreads on ROP bonds maturing in 2006 have gone down by 144.3 bps, so did the spreads on ROP bonds maturing in 2013 which are now 160.8 bps closer to US treasuries compared to last year’s spreads. The spreads on ROP 2025, on the other hand, have gone down by 154.3 bps since December 2003.

"I was surprised when I looked at the data because clearly, the positive sentiment is there," McGowan said. "ROP bonds are pretty resilient at the moment."

According to McGowan, however, this resilience was also partly due to the fact that investors are desperate for yields because interest rates in the major markets are low.