Peso seen testing 46:$1 level this year

The peso is seen exploring the 46:$1 level for the first time in five years this year, as the upswing in the US interest rates is seen further boosting the greenback at the expense of the local currency, analysts said.

Jonathan Ravelas, chief strategist at Banco de Oro Unibank said: “For 2015, the bank projects the local currency to depreciate to 45.50:$1 as the end of the Federal Reserve’s quantitative easing and the imminent interest rate hike in the US could dampen demand for the peso.”

BDO sees the local currency trading between 44 and 46 against the dollar this year.

The last time the peso hit the 46:$1 level was in 2010.

UBS sees the peso weakening to 47:$1 at the end of 2015 and further to 49:41 by the end of 2016 in the face of higher US interest rates and a stronger US dollar.

The local currency may average at 46.70 this year and 48.30 against the greenback in 2016, based on a research by UBS economist Edward Teather.

“Many Asian central banks, the BSP (Bangko Sentral ng Pilipinas) included, buy US dollars [to increase foreign reserves] when their currencies are under pressure to appreciate and this causes the domestic money supply to expand. This must be sterilized usually with central bank debt or by adjusting reserve requirement ratios on deposits. The process flows in the other direction when currencies are under pressure to depreciate,” Teather added.

New York-based think-tank Global Source, in a report authored by economists Romeo Bernardo and Marie-Christine Tang, said Philippine authorities would likely allow a drawdown on its international reserves, reported at $79 billion as of the end of November, which they think is on the high side considering the country’s current account surpluses.

“Keeping in mind the key policy objective of keeping the exchange rate in line with movements of regional currencies to maintain export competitiveness, we are expecting a weaker peso that is closer to 46:$1 by the end of 2015,” Global Source said.

UBS said that having appreciated in two years prior to 2013, the peso underperformed compared to the baht and ringgit in 2013, suffering more than those economies from the incremental tightening of global monetary conditions and an increase in the supply of pesos at home. But contrary to UBS expectations, the peso showed stability in 2014, benefiting from a credit rating upgrade and low US rates, the investment bank said.

The peso ended 2014 at 44.617 to $1, slightly weaker than the 44.1043 to $1 at the end of 2013.

Local stock brokerage AB Capital Securities said another impact of the rapid decline in oil prices would be a similarly rapid US dollar strengthening which, in turn, would have detrimental effects on import-reliant industries and on countries with significant debt denominated in US dollars.

“In the case of the Philippines being a net importer and having about 35 percent of its debt in foreign currency, the rapid US dollar appreciation poses a reasonable threat,” the brokerage said.