Peso seen strengthening to 54.50:$1 by yearend

MANILA, Philippines — The peso may strengthen to 54.50 to $1 by year’s end after weakening by almost 10 percent to settle at 55.755 in end-2022 from 50.999 in end-2021, according to British banking giant HSBC.

James Cheo, chief investment officer for Southeast Asia at HSBC, said in an online press briefing that the local currency may appreciate further toward the end of the year to 54.50 to the dollar.

“On the currency front, with the peaking of the dollar strength, we think that the peso could reach 54.5 to $1 by the end of 2023,” Cheo said.

The headwinds, Cheo said, include the slowing down of parts of the economy on the export side, as well as the interest rate differential between the Bangko Sentral ng Pilipinas (BSP) and those of Indonesia and India, among others.

“Indonesia has higher interest rate differential compared to the Philippines so the flow of funds will kind of favor the places with higher interest rates and higher growth,” he said.

According to Cheo, the peso would ultimately stabilize on the back of the weakening of the dollar.

“There will be kind of a stabilization of peso toward the end of the year. But ultimately, I would say that the near term really depends on the global sentiment. So if you do get periods of risk off for example, then it’s very hard for the peso to kind of outperform,” Cheo said.

He said the BSP could still hike policy rates, after taking a prudent pause on May 18.

“In the Philippines, the central bank kept the policy rate unchanged at the May meeting, but may tighten further if inflation surprises on the upside. Inflation is stickier in the Philippines compared to the rest of the region,” Cheo said.

After a cumulative 425-basis-point rate hike since May last year, the BSP kept key policy rates unchanged on May 18 due to the inflation downtrend and the robust gross domestic product (GDP) growth of 6.4 percent in the first quarter.

Inflation averaged 7.5 percent, well above the central bank’s two to four percent target range, despite easing to a 12-month low of 6.1 percent in May from 6.6 percent in April.

“However, at this juncture, if the inflation trend remains under control, we assess the BSP to stay on hold for the rest of 2023,” Cheo said.

He said the Philippines’ monetary policy is still going to be tight and growth may slow down so HSBC is neutral on the Philippine equity market for now.

“Consensus growth for the stock market remains healthy for 2023. The stock market’s valuation is undemanding. We think opportunities in the Philippine stock market will be in selected consumer companies and banks,” Cheo added.

After slumping to an all-time low of 59 to $1 last October, the peso bounced back to the 53 to $1 handle last February due to the aggressive rate hikes delivered by the BSP Monetary Board, as well as the central bank’s aggressive intervention in the foreign exchange market.

The British banking giant sees the country’s GDP slowing significantly to 4.8 percent this year after accelerating to 7.6 percent in 2022 from 5.7 percent in 2021.

Cheo said the economy has been driven by robust private consumption, investment and sustained public infrastructure spending.

“Philippine economic recovery is going to be more gradual as global growth slows. Strong employment, tourism recovery, expanding production and retail sales, and public investment will continue to support growth for the rest of 2023,” he said.

HSBC chief investment officer for Asia Fan Cheuk Wan said the US Federal Reserve is likely to deliver another 25-basis-point hike next month after a pause from its monetary tightening this month.

“We anticipate the Fed to be near the peak in policy rates and we expect one more rate hike of 25 basis points in July. Taking into account sticky core inflation, we expect the Fed to start cutting policy rates in the second quarter of next year with a total of three 25-basis-point rate cuts in 2024. Historical market performance shows that a peak in US policy rates will be positive to risk assets, including equities, investment grade credit, emerging market and Asian assets,” Fan said.