Peso seen to stabilize

The market expects the peso to consolidate after dropping to its weakest level in a year, with further losses to be limited by remittances from overseas Filipino workers (OFWs).

said yesterday the peso is expected to stabilize following its recent weakness, especially with the Bangko Sentral ng Pilipinas (BSP) likely to continue tightening its monetary policy settings.

“Remittances are expected to sustain their strong trend and support the BSP’s efforts in limiting peso weakness,” Merrill Lynch said in its Global Currency Strategy report.

“Nevertheless, sentiment is likely to remain generally bearish as the trade and investment outlook stays weak,” Merrill Lynch said.  

Merrill Lynch said sentiment toward Asian currencies had deteriorated abruptly since late July with the recent strensthening of the dollar coinciding with renewed Asian growth concerns.

“At the same time, the markets are disappointed with the relatively muted tightening in response to inflation pressures,” Merrill Lynch said.

“Intervention would also have the effect of keeping imported inflation in check,” Merrill Lynch said. “USD-Asia should head lower as we expect the USD bounce to retrace somewhat.”

Merrill Lynch said the August inflation rate was critical and the market also wanted to see the latest data on the country’s balance of payments position which would come out on Sept. 16.

Monetary officials have already said they were unconvinced that the economic slowdown in the second quarter created enough room to end the tightening cycle, with the inflation rate still significantly above the official target for 2008 and 2009.

BSP Governor Amando Tetangco said monetary policy still needed to be “appropriately tight” to stabilize inflation to within the target range over the policy horizon, and to help manage inflation expectations.

The BSP has already raised its policy rates by 100 basis points so far this year and the market had been trying to anticipate if the degree of the first semester slowdown was enough to end the cycle.

Despite this, the inflation rate is still climbing due to volatile oil and food prices, hitting 12.2 percent in July and possibly going up to as high as 12.6 percent in August. The target inflation for the year is three to five percent but the year-to-date average was already at 8.3 percent.

Asian markets are faced with the challenge of the strong US dollar and growth concerns but Merrill Lynch said earlier that the BSP should have an easier time stemming the weakness of the peso.

Merrill Lynch had originally expected the Philippine peso to stand at P44.50 by the end of 2008, strengthening to P44 early next year before dropping to P45.50 by the end of 2009.

Merrill Lynch said it expected Asian foreign exchange markets to stabilize with the US dollar generally moving lower against most Asian currencies including the peso.

According to Merrill Lynch, the BSP should have “some success” in stemming the weakening of the peso, however.

Economists have long expected that besides the rapid increase in inflation, the falling peso and its declining dollar reserves would pressure the central bank to continue tightening its monetary policies more aggressively for the rest of the year.