Peso unlikely to weaken back to 59:$1 – Metrobank

MANILA, Philippines — Metropolitan Bank & Trust Co. (Metrobank) believes the peso is unlikely to hit the record low 59 to $1 level reached last October even if the interest rate differential between the Bangko Sentral ng Pilipinas (BSP) and the US Federal Reserve tightens.

In its latest bulletin, Metrobank said the local currency is likely to hover within the 56 to $1 level over the next few months on the back of robust inflows amid the steady growth in remittances from overseas Filipino workers (OFWs).

“The market is currently forecasting USD/PHP to possibly trade beyond the 56-level over the next few months as importations pick up in line with seasonality, before moving back lower towards year-end when OFW remittances traditionally flow into the country,” the Ty-led bank said.

The peso slumped to an all-time low of 59 to $1 last October due to a series of aggressive rate hikes by the US Fed to fight inflation.

However, after moving in tandem with the US Fed to maintain a healthy interest rate differential and active intervention in the foreign exchange market using the gross international reserves (GIR), the local currency rebounded strongly to the 53 to $1 handle last February.

After emerging as one of the best performing currencies in the region, the peso depreciated slightly by 0.19 percent to 55.86 to $1 from the end-2022 level of 55.755 to $1.

When the interest rate differential between the peso and the US dollar is wide relative to historical averages, foreign portfolio investors are more incentivized to purchase pesos so that they could invest in the higher yielding peso instruments.

When the differential is narrow relative to history, the opposite happens, that is, foreign investors sell their pesos and go back to US dollars.

Over the last 10 years, Metrobank said the interest rate differential in policy rates between the two currencies averaged 200 basis points (bps) but has now tightened to 100 bps.

Moreover, the bank said markets are concerned that tighter interest rate differential at the policy rate level could result in portfolio outflows, leading to a weaker peso.

However, Metrobank’s analysis suggests that the USD/PHP rate is not solely influenced by central bank’s policy rates, which are overnight rates.

Metrobank found that historically, the exchange rate also depends on the interest rate differential (IRD) between the 10-year peso government securities and US Treasury bonds as well as the GIR level.

“When comparing 10-year Philippine and US bond yields, the IRD between the two currencies has remained well above 200 bps and much closer to its 10-year historical average of around 250 bps. The yield premium helps attract foreign portfolio investors to long-term peso government securities, which tempers selling pressures on the peso, especially now that both the BSP and Fed are at or near the end of their rate hiking cycles,” Metrobank added.

Metrobank said the GIR level that serves as buffer remains strong at $101.76 billion as of end-April and could support the peso and manage volatilities.

Amid the inflation downtrend and robust gross domestic product growth in the first quarter of the year, the BSP’s Monetary Board ended its year-long tightening cycle that saw key policy rates rise by a cumulative 425 bps, bringing the benchmark rate to a 16-year high of 6.25 percent.

The Fed likewise paused its rate-hiking cycle as it held rates steady but signaled its support for two more interest rate rises this year to a range of 5.50 percent to 5.75 percent.

“Given these, Metrobank therefore believes the BSP may no longer need to match every policy move of the US Federal Reserve, as it did in the latter part of 2022,” the bank said.