Peso seen weakening to 48.80 vs $1 in 2016

THE PESO will likely depreciate to around 48.80 against the US dollar this year as the hike in US interest rates, weaker growth in China and slump in oil prices may further weaken Asian currencies, said an economist from Dutch financial giant ING.

ING Bank Manila senior economist Joey Cuyegkeng said in his latest research that the peso would likely depreciate by 3-4 percent this 2016, a more modest pace than the 5.2-percent weakness seen last year.

This outlook is more bearish than the market consensus (based on Bloomberg survey) that the peso will slip by 1.8 percent this year.

Some of the factors that depressed Asian currencies last year could linger this 2016, Cuyegkeng said, particularly the “divergent” monetary policy across central banks.

While the US Federal Reserve had started a new cycle of interest rate hikes in December, other major central banks and some Asian central banks are easing monetary policy and allowing their currencies to weaken to perk up growth.

“The divergence is likely to persist in the first half of 2016 and could extend to the second half depending on the improvement in the economic activity in Eurozone and in Japan,” said Cuyengkeng, who believes that the US Fed would hike rates by only 50 basis points this year compared to the 100-basis point hike projected by other analysts.

“Policy divergence is likely to continue in the near term, benefiting the US dollar,” he said.

Meanwhile, the economist said economic growth in China would likely further slow down this year, with growth seen at 6.3 percent.

ING, however, continues to expect a soft landing for China as its policymakers are seen to support economic activity while pursuing reforms. Nonetheless, it is perceived that a weaker Chinese yuan is part of the overall formula to support growth.

Another factor closely linked to a weaker China and emerging market growth is the plunge in commodity prices, Cuyegkeng said. Apart from modest recovery in Japan and European Union, the economist said the slump in oil prices was also due to the Organization of Petroleum Exporting Countries (Opec)’s decision to maintain high production levels while the lifting of sanctions on the export of substantial Iran oil had added to the supply glut.

“The excess supply condition for key commodities is expected to linger at least in the first half of 2016. But a significant correction of the excess supply situation in the second half would also require a more significant recovery in major economies,” he said.

Given these external jitters, Cuyegkeng said the peso would remain under pressure this year even as economic fundamentals have held up relatively better.

The economist said structural inflows remained on a trend toward $50 billion in the next couple of years although doubts on the likely growth of overseas Filipino workers (OFW) remittances had emerged.