Peso may continue to weaken vs US dollar on widening trade gap

Given the country’s widening trade gap, the peso may continue to weaken against the US dollar over the medium term.  But for the remainder of this year, the local currency could find some relief and bounce to 52.95:$1 against the greenback, economists at Ayala-led Bank of the Philippine Islands said.

In a research note by a team led by economist Emilio Neri Jr., the peso’s short-term appreciation bias in the fourth quarter of 2018 will be supported by the monetary tightening of the Bangko Sentral ng Pilipinas (BSP), the seasonal influx of overseas remittances related to Christmas spending, support to typhoon victims and a mild reversal of net foreign selling in the local stock market.

In a separate research note, the BPI economic research team believes that the country’s inflation rate has yet to peak given the uptrend in global oil prices, which could prompt the BSP to further hike its key interest rates by at least 25 basis points in November.

The inflation-targeting monetary authority has so far raised interest rates by a total of 150 basis points this year.

Recent oil price trends are preventing a turn in the headline inflation print in the near term given that oil is still a major driver of inflation.

The West Texas Intermediate crude oil price recorded a 40 percent year-on-year increase in September.

Over the medium-term, however, BPI expects the peso to slip by 2-4 percent annually, noting that the expansion of the trade deficit continued to reflect the encouraging growth momentum of investment spending in the Philippines.

“The private sector has been expanding their capacity through the construction and expansion of factories and the purchase of machinery in order to meet rising consumer spending and to support government infrastructure projects,” the research said.

As such, BPI sees the peso continuing to depreciate in the medium-term as the widening trade deficit is expected to continue as big-ticket infrastructure projects kick in by next year.

The trade gap is expected to significantly exceed overseas remittances.

On Wednesday, it was reported that the Philippine trade deficit for August surged by 38.2 percent year-on-year to $3.51 billion. For the eight month-period, the trade gap widened to $28 billion from $15.7 billion in the same period last year.