US financial giant Citigroup expects continuing volatility in the Philippine foreign exchange market as a result of the global financial turbulence, projecting the peso to end at 45-to-$1 level this year but return to 47 by the second quarter of next year.

On Wednesday, the peso closed at 46.44 to the dollar, up from Tuesday’s finish of 46.56.

In a Sept. 19 commentary, Citi economist for the Philippines, Jun Trinidad said the recent market volatility would trigger a massive shift among retail investors to liquid, safe assets. This, he said, would tighten bank lending and limit access of borrowers to longer-term loans.

“Limited credit access, alongside poor consumer and business sentiment, would reinforce our expectations that durable goods spending, including spending for capex (capital expenditures), would be handicapped in this environment. Alleviating this potential credit crunch would require a policy bias that’s neutral on rates, while the infusion of liquidity if need arises,” Trinidad said.

He said the increase in the benchmark interest rate of the central bank — the overnight borrowing rate — to 6.00 percent in late August might be the end of the monetary tightening campaign.

“We believe prevailing market conditions comprise an excellent opportunity to reassess positions moving forward. Monetary policy would be on a neutral footing at this juncture,” Trinidad said.

He said forced bank mergers and US Treasury bailout plans would certainly go a long way toward stabilizing onshore risk perception.

“This would also allow the markets and the [central bank] to seek a better level for the local currency that would be conducive for normal trading,” Trinidad said.

He projected the exchange rate would settle at 46.50 to the dollar at end-September.

He said that in the first half of 2009 the peso would likely trade at 46-47 to the dollar.

“We expect the peso to continue to trade wildly against the dollar — down 50 centavos on one day and up by 30 centavos in the next session — as the local currency continues to trade on rumors, speculation and news on unfolding event risk triggered by Lehman’s bankruptcy,” he said. With editing by INQUIRER.net