The Philippine peso is a standout among emerging market currencies (EM) this year. While many EM currencies weakened significantly against the US dollar on the back of rising US interest rates, the peso has been stable. Closing at 48.38 against the dollar last Friday, it is just 0.9 percent off its recent top of 47.93.
US rates rise on recovery hopes
In February, we pointed out that US interest rates have bottomed out given the rising inflation expectations (see Peso hits turning point at 48, Feb. 22). Better news on the pace of US vaccinations, plus the enormous fiscal stimulus from the Biden administration, raised hopes for a faster US recovery. The yield on the benchmark 10 year Treasury note exploded 246 percent from 0.504 percent in August 2020 to a high of 1.744 percent last month as investors bet the US Fed will raise rates to tame inflation.
Rotation from EM back to the US?
When US rates increase, it reduces the appeal of higher-yielding, but riskier EM assets. Global investors began to scale back their allocation to EM this year as the US rate rise gathered pace. Flows to EM equity and debt portfolios slowed in March to their weakest in almost a year as rising US yields continue to weigh on EM.
Indian rupee and Brazilian real tumble on surging outbreak
The currencies of countries like India and Brazil, which are struggling to bring the coronavirus under control and dealing with new viral mutations, weakened considerably in the past month. India is the second largest COVID-infected nation in the world, with more than 16 million cases. It reported 345,147 new cases last Friday – the biggest daily spike since the pandemic began. Recently, the Indian rupee tumbled as much as 4.5 percent against the US dollar due to its surging outbreak.
On the third spot, Brazil is following the US and India, with more than 14 million COVID-19 cases. The “Brazil variant” of the virus is more contagious and seems to be affecting younger people with no pre-existing comorbidities. The Brazilian real, which is down 5.4 percent year-to-date, lags against its Latin American counterparts due to its mounting COVID concerns.
Turkish lira, the worst EM currency
Meanwhile, the Turkish lira looks to be the worst EM currency. With its higher level of political risk and concerns over its financial stability, the lira has lost 21.7 percent against the US dollar from its February high and is weaker 13.3 percent year-to-date.
Thai baht suffers from tourism’s wipeout
In Asia, the Thai baht is the worst performer so far this year. It fell five percent from its February high, given the bleak outlook of travel and tourism. Its rising coronavirus case count and the new outbreak of a highly contagious variant look set to delay plans to reopen its borders to much-needed tourism.
Phl peso steady
Like many EM countries, the Philippines suffers from rising COVID cases and delayed vaccine rollout. However, these negatives are offset by the narrowing trade shortfall, steady flow of overseas remittances, and healthy foreign exchange levels. The peso has traded steadily this year, slightly down by just 0.7 percent against the US dollar year-to-date.
Philequity Management is the fund manager of the leading mutual funds in the Philippines. Visit www.philequity.net to learn more about Philequity’s managed funds or to view previous articles. For inquiries or to send feedback, please call (02) 8250-8700 or email ask@philequity.net.