Metrobank: Peso Unlikely To Weaken Back To 59:$

Metropolitan Bank & Trust Co. (Metrobank) has expressed confidence that the peso will not slide back to the record low P59 to $1 level reached last October even if the interest rate differential tightens between the Bangko Sentral ng Pilipinas (BSP) and the US Federal Reserve.

Photo Insert: Metrobank believes the BSP may no longer need to match every policy move of the US Federal Reserve.

The bank said in its latest bulletin that the local currency is likely to hover within the P56-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 P56-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 bank said.

The peso had slumped to an all-time low of P59-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 P53-to-$1 handle last February.

After emerging as one of the best-performing currencies in the region, the peso depreciated slightly by 0.19% to P55.86-to-$1 from the end-2022 level of P55.755-to-$1.

When the interest rate differential between the peso and the US dollar is wide relative to historical averages, foreign portfolio investors become 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 the 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.

It said the GIR level that serves as a 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%, it pointed out.

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%-to-5.75%.

“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.

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