Peso may weaken anew vs the dollar as large Fed hike looms

THE PESO may decline anew against the dollar this week on expectations of another large rate increase from the US Federal Reserve at their monetary policy meeting.

The local unit closed at P57.97 on Friday, strengthening by 25 centavos from its P58.22 finish on Thursday, data from the Bankers Association of the Philippines showed.

This was the peso’s best close in over a month or since it finished at P57.48 a dollar on Sept. 20.

Week on week, the peso climbed by 78 centavos from its P58.75-per-dollar close on Oct. 21.

The peso opened Friday’s session at P58.30 per dollar. Its weakest showing was at P58.35, while its intraday best was at P57.82 versus the greenback.

Dollars exchanged dropped to $912.35 million on Friday from $1.077 billion on Thursday.

Philippine financial markets were closed for public holidays from Oct. 31 to Nov. 1.

Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort attributed the peso’s climb on Friday to an increase in remittances from overseas Filipino workers ahead of the long weekend.

MUFG Global Markets Research Currency Analyst Sophia Ng said the peso appreciated week on week on expectations of slower Fed hikes by next month.

“The peso’s 1.3% rebound against the dollar last week was its strongest weekly gain since the week ended July 29. This was mainly driven by dollar weakness as markets pared back expectations of Fed rate hikes in the near term, as well as exceptionally hawkish rhetoric by the authorities,” Ms. Ng said.

The dollar posted losses towards the end of last week due to expectations that the Fed could consider smaller interest rate hikes by December following dovish comments from some officials and weak data that indicated a slowing US economy.

Meanwhile, Bangko Sentral ng Pilipinas (BSP) Governor Felipe M. Medalla last week said the Philippine central bank could match the Fed’s rate hikes point by point to support the peso and prevent its depreciation from adding to inflation risks.

He said the Monetary Board may raise benchmark interest rates by 75 basis points (bps) at their Nov. 17 meeting if the Fed delivers a hike of the same magnitude at their Nov. 1-2 review.

“We now see the BSP hiking the benchmark overnight reverse repurchase rate by 75 bps in November and at least 50 bps in December after 225 bps of cumulative rate hikes so far this year,” Ms. Ng said. This will bring the policy rate to 5.50% by yearend, the highest since December 2008.

“Markets have pared back Fed rate hike expectations the past week, but if the FOMC (Federal Open Market Committee) turns out to be more hawkish than expected, [the exchange rate] is likely to rise again. The P59 mark still looks to be a good level of topside resistance for now,” she said.

However, the dollar’s recent weakness may only be temporary as market players will seek guidance on the Fed’s rate action in December after the central bank delivers another large rate hike at their meeting this week, UnionBank of the Philippines, Inc. Chief Economist Ruben Carlo O. Asuncion said in an e-mail. The FOMC’s last rate-setting meeting for the year is scheduled on Dec. 13-14.

Aside from the Fed’s policy meeting, Ms. Ng said investors will also look at October inflation and merchandise trade data releases for trading leads.

The BSP on Monday said October headline inflation could have settled at 7.1% to 7.9% in October, driven by rising food prices, higher transport fares and the peso’s depreciation. 

If realized, October inflation would exceed the central bank’s 2-4% target for the seventh straight month. This would also be faster than the 6.9% seen in September and 4% in the same month last year.

A BusinessWorld poll of 14 analysts conducted last week yielded a median estimate of 7.2% for annual inflation in October.

For this week, Mr. Ricafort sees the local unit moving from P57.50 to P58.25 per dollar, while Mr. Asuncion expects the peso to trade weaker at P57.80 to P58.60. — Keisha B. Ta-asan