Peso falls below 54:$1

The value of the peso dropped past 54 to a dollar on Wednesday—the lowest in almost 13 years—as sentiment toward the currency remained bearish due to an ongoing rout against emerging market currencies and a stubbornly high local inflation rate.

On the foreign exchange market, the peso ended the trading session at 54.13 to $1, which was less than three centavos off the low of P54.155 set on Dec. 2, 2005.

“On top of the bearish outlook of emerging market currencies, the Philippines is also struggling with a large current-account deficit, and the latest numbers provide additional concern,” a bank treasurer said.

Yesterday, the government said that the country’s trade-in-goods deficit further widened to $22.49 billion at the end of the first seven months as the sustained jump in imports outpaced exports recovery in July.

Trading volume on the foreign exchange market was heavy with $772.5 million changing hands versus only $434.1 million during the previous day.

The peso weakened to as low as 54.14 before pulling back slightly toward the end of the trading session.

“Hopefully, P54.50 holds. Otherwise, [it’s] to infinity and beyond,” said another fund manager with a local bank, asking not to be quoted because the Bangko Sentral ng Pilipinas was growing increasingly sensitive to comments from market participants.

Wednesday’s drop came despite the decision of the central bank to reactivate a dollar hedging mechanism introduced during the 1997 East Asian financial crisis—and used heavily during the financial markets turmoil in the lead up to former President Estrada’s resignation in 2001—in a bid to cushion the currency’s drop.

BSP Governor Nestor Espenilla Jr. said the Currency Risk Protection Program would be made available to eligible corporations with foreign exchange obligations based on more liberalized rules. With this scheme, regulators hope that large corporations with future dollar needs would not rush to buy them early, thus aggravating the peso’s weakness.

Last week, the BSP chief warned that regulators would take “all actions necessary” against “speculative activity by market participants” who have pushed the currency lower in recent weeks.

The peso’s weakness is expected to persist until next year given a widening current-account deficit coupled with a wider budget-deficit cap, London-based Oxford Economics said.

“We expect solid external and macroeconomic fundamentals to support most Asean countries’ currencies in the face of another emerging market selloff. But persistent current-account deficits and a large share of foreign investors holding local debt, such as in Indonesia, mean the Indonesian rupiah and the Philippine peso are likely to remain vulnerable,” Oxford Economics lead Asia economist Sian Fenner said in a Sept. 11 report titled “Better fundamentals to support Asean FX.”

“The Turkish currency crisis once again highlighted the importance of countries’ idiosyncrasies in driving foreign exchange moves this year. The Indonesian rupiah and the Philippines peso, the two Asean currencies with current-account and fiscal deficits, have come under more market pressure than their peers that have current-account surpluses,” Oxford Economics said.

“Indonesia and the Philippines both have current account deficits and are therefore dependent on foreign portfolio inflows. The Philippines also depends on remittances. A large driver behind the widening in their external balances has been strong fiscal spending that boosts import demand,” Oxford Economics explained.