Citi: No crisis seen in peso breaching the 50:$1 mark

The peso would likely drift into the P50:$1 level within the next six to 12 months but this is no cause for alarm as such adjustment is needed for the local currency to stay regionally competitive, according to an economist from American banking giant Citigroup.

“This is not a PHP (Philippine peso) signal of an imminent crisis of fundamentals but merely a repricing of macro risks,” Citi Philippines economist Jun Trinidad said in a research note dated Nov. 23.  The economist does not see the peso depreciating way beyond the 50-mark against the greenback.

“Recent global developments triggered by the US election outcome and prospective Fed (US Federal Reserve) hiking cycle prompting rising US treasuries resulted in a stronger US dollar outlook that compelled the rest of the world to re-adjust,” Trinidad added.

On Tuesday, the peso closed at P49.73 against the US dollar.  The local currency, now flirting with the 50-mark, has just hit its weakest levels since 2008.

While dim memories of the political crisis years of 2001 to 2004 were coming back, Trinindad said the peso—now armed with “investment grade fundamentals”—was now in a very different situation.

The Philippines has, since then, greatly reduced its dependence on offshore markets for funding growth and other obligations, Trinidad said.

He said the peso would be able to finally reflect its fundamentals when repricing of macro risks winds down.

The economist said the peso’s current weakness could likely be correlated with Asian foreign exchanges since bulk of the country’s trade, including remittances and investments, are sourced in Asia.

Trinidad argued the peso’s real effective exchange rate (REER) index, a trade weighted benchmark of currency competitiveness, would have to closely track the REER of four Southeast Asian countries: Malaysian ringgit, Indonesian rupiah, Singaporean dollar, Thai baht and Chinese renminbi. The Philippines has “structural” bilateral trade deficits with these countries.

For every 1 percentage appreciation or depreciation by the Asean-4 REER, Trinidad estimated the peso would correspondingly adjust by 0.79 percent.  The correlation with the Chinese yuan is seen lower at 0.32 percent.

Moving forward, Citi said the Bangko Sentral ng Pilipinas’ “implicit” preference’ for Philippine REER could be a guide for prospective spot rate.

In its sensitivity tests, wherein it assumed REER at 100 (versus the September REER of 110.93), Citi obtained an exchange rate of P52:$1. At 105, Trinidad said the REER would be consistent with a spot rate of P50.3.

Unless a crisis unfolds, Citi deemed that any REER lower than 100 would be excessive. But lacking this REER bias, Citi forecasts the peso at P50 in six to 12 months.

“Will PHP revisit P55-P56 before this risk repricing is done with? With upside inflation risks and strong domestic demand that evokes policy rate hike expectations coupled with sharply higher local bond yields, rate differential support for PHP is building up,” Trinidad said, adding that the recent depreciation was also consistent with the rest of Asian foreign exchange that reflected regional competitive adjustments.