Peso seen ending 2018 at 50.50 to $1

The peso will likely end this year at 50.50 against the dollar, stabilizing relative to current levels but underperforming most Asian emerging market currencies in what is likely to be a bearish episode for the greenback, economists from British banking giant Standard Chartered said.

“We expect the dollar-peso to be largely range-bound for most part of 2018,” Divya Devesh, Stanchart Asia foreign exchange strategist, yesterday said in a press briefing.

This relative stability of the local currency, however, is seen to come at a time when the dollar may broadly weaken. Stanchart’s bearish view on the greenback is due to expectations that the US Federal Reserve will pursue just a modest monetary tightening while US assets have become less attractive because global growth has become more synchronized across key regions.

As such, Devesh said the peso would likely continue to underperform other currencies in Asian emerging markets as it had already done in the last two to three years.

Devesh said that Stanchart first turned bearish on the peso in November 2015 largely due to concerns on overvaluation and the deterioration of the current account.

“Now, the good news is the Philippine peso is not overvalued anymore. In fact, as per our estimates, the peso is very close to its fair value, so that takes out one of the headwinds. But the current account story hasn’t really improved,” he said.

At the same time, Devesh said sentiment on the ground remained weak for the peso, reflecting a quite strong demand for US dollars.

“We see that in terms of higher demand for foreign currency debt, foreign currency deposits, companies paying back foreign currency loans,” Devesh said. “So this combination of strong dollar demand onshore along with current account deficit will probably keep some pressure on the peso.”

On the dollar side of the equation, Devesh said inflation expectations in the United States remained quite low. To date, he noted that financial markets were pricing in just four Fed interest rate increases stretched out over a two-year period.