The peso’s weak performance is expected to continue, with a projected decline to 57 to $1 this month.
This downward trend can be attributed to seasonal headwinds and market speculation surrounding the future actions of the US Federal Reserve.
In its latest analysis of foreign exchange trends, ANZ Research has noted the local currency’s historical tendency to weaken during June.
Examining data dating back to 2000, ANZ found that the peso has weakened against the US dollar in 18 instances during June, experiencing an average decline of 0.9 percent.
On occasions when this seasonal pattern occurred, the average decline reached 1.6 percent.
ANZ acknowledges the statistical significance of the peso’s weakness in June but admits that the exact cause is still unclear.
Despite analyzing trade balance and remittance flow data, a distinct pattern has yet to emerge to explain the peso’s recurring decline during this period.
Moreover, aside from seasonal factors, the peso must also contend with the challenge posed by a stronger dollar.
Attention has shifted back to the US Federal Reserve’s upcoming policy meeting on June 14, following a resolution on the debt ceiling issue.
ANZ highlights that certain Fed officials perceive progress in restoring US inflation to its target as inadequate.
Meanwhile, the US economy remains resilient, with a tight labor market and diminished regional banking stress.
Now that the debt ceiling uncertainty has been resolved, market expectations are pricing in a greater than even chance of a 25-basis-point rate hike at the June FOMC meeting.
Should this come to fruition, the Fed funds rate would reach 5.50 percent.
ANZ emphasizes the peso’s adverse conditions in the coming month, which may result in a slide toward 57.
Despite a promising performance earlier this year that brought the peso to the 53 to $1 level in February, it has since weakened, surpassing the 56 to $1 threshold from the end of 2022, which stood at 55.755 to $1.
Notably, this decline occurred despite the better-than-expected gross domestic product (GDP) growth of 6.4 percent in the first quarter, surpassing market projections of 6.1 percent.
Additionally, Fitch Ratings’ revision of the country’s credit rating outlook from negative to stable failed to halt the peso’s depreciation.
ANZ explains that these positive developments must be revised to counterbalance the peso’s decline due to the country’s sizable trade deficit.
Furthermore, the strengthening of the US dollar, initially driven by uncertainties surrounding the debt ceiling negotiations and now propelled by heightened expectations of another Fed rate hike, has exerted additional downward pressure on the peso.
Despite these challenges, ANZ believes the peso is confronting a different formidable headwind than it did the previous year.
The Federal Reserve’s tightening cycle is nearing its conclusion, global commodity prices have stabilized, Philippine inflation is moderating, and the external deficit is expected to improve.
ANZ expects the Bangko Sentral ng Pilipinas (BSP) to continue effectively managing any near-term peso volatility as the country’s foreign exchange reserves remain substantial.
ANZ maintains its end-of-2023 foreign exchange forecast, predicting the peso to stabilize at 54 to $1.
The recovery in the year’s second half is anticipated to be gradual initially.
However, ANZ draws attention to the potential for a swift rally, drawing on the period between November 2022 and February 2023, when the peso demonstrated remarkable resilience once sentiment shifted.
ANZ foresees improved prospects for the peso during the year’s second half as the Federal Reserve’s tightening cycle concludes and the Philippines’ trade deficit shows signs of improvement.
The country recorded a broader balance of payment surplus of $3.5 billion in the first quarter, driven by robust remittances from overseas Filipino workers, increased foreign direct investment inflows, and the government’s successful $3 billion global bond issuance in January, despite a widening trade deficit.
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