Peso seen to weaken as US-Iran tensions intensify
The peso is seen taking a hit from escalating tensions between the United States and Iran as oil becomes more expensive.
BDO Unibank Inc. chief market strategist Jonathan L. Ravelas said he expected the local currency to trade within the range of 51 to 51.25 against the dollar this week after closing at 51.09 versus the greenback last Friday.
Ravelas noted that the peso’s close last week was a “far departure” from end-2019’s 50.635:$1 as “the Philippines’ energy import bill will soar with the surge in crude prices in the wake of the airstrike in Iraq.”
The US attack on Jan. 3 killed top Iranian commander Qasem Soleimani, prompting Iran’s government to express moves to avenge his death.
Global oil prices climbed by more than 4 percent after the airstrike at Baghdad airport amid investor worries on the US-Iran conflict’s impact on the commodity’s supply.
In an email Friday, ING Bank Manila senior economist Nicholas Antonio T. Mapa said the brewing tension in the Middle East “forced broad risk-off tone with the peso retreating with safe haven assets such as the dollar back en vogue.”
“Crude oil prices naturally spiked on possible supply tightness, which exacerbated the peso’s retreat as more expensive oil translates to increased demand for the dollar,” Mapa said.
Also, given the substantial deployment of overseas Filipinos in the region, the threat of a possible disruption in remittance flows threatened the supply side for dollars and its concurrent boost to domestic spending, thus slowing GDP [gross domestic product] growth at least marginally, Mapa added.
The latest Philippine Statistics Authority (PSA) data showed that in 2018, 1.26 million Filipinos were working in the following Middle Eastern or West Asian countries: Bahrain, Israel, Jordan, Kuwait, Lebanon, Saudi Arabia, Qatar and the United Arab Emirates (UAE).
From January to October last year, cash remittances from Filipinos living and working in the Middle East declined 7.8 percent year-on-year to $5 billion even as Kuwait, Saudi Arabia and the UAE were still among the top sources of inflows, the latest Bangko Sentral ng Pilipinas (BSP) data showed.
“If this [US-Iran conflict] devolves further or drags along, the sustained pressure on the peso and oil prices could fuel inflationary pressures, which would derail consumption momentum to some extent. However, if this is resolved quickly and the Jan. 15 signing of the phase-one deal comes back to light, we could see sentiment swing back to risk-on tone very quickly,” Mapa said, referring to the planned US-China trade deal signalling better relations between Washington and Beijing.
London-based Capital Economics nonetheless said that world oil prices “would need to rise much further before higher prices started to have a major impact on inflation or monetary policy” across Asia.
“Given that energy and transport prices have a relatively low weight in most country’s inflation baskets, this jump in oil prices is only likely to push up inflation by around 0.1 percentage point. With the key exceptions of China and India, inflation across most of the region is very low and policymakers are unlikely to be too concerned,” Capital Economics senior Asia economist Gareth Leather said in a Jan. 3 report titled “Oil price spike to have limited impact on inflation.”
In the case of the Philippines, headline inflation averaged 2.5 percent at end-November last year, within the government’s 2-4 percent target range.
While the PSA will release the December 2019 inflation figure on Tuesday, Jan. 7, the BSP already projected the rate of increase in prices of basic commodities to have had settled within the range of 1.8-2.6 percent that month.
For Capital Economics, “the much bigger risk is that the crisis in the Middle East escalates to a full-blown military conflict, which pushes up global oil prices to well over $100 per barrel.”
“This would be more likely to unnerve policymakers, especially in India, Vietnam and China, where inflation is already above target. But so long as this is avoided, we think most central banks in emerging Asia will cut interest rates further over the coming months,” Capital Economics said.
Capital Economics had projected the BSP to cut interest rates by 50 basis points this year.
In a separate report, UK-based Oxford Economics said that the US strike “will fuel further hostilities in the region, especially in Iraq, and will keep the oil price risk premium elevated” such that “risks to our 2020 Brent oil price forecast of $64.6 have become tilted modestly to the upside.”
“Tensions in the Middle East have been elevated in the wake of attacks in the Strait of Hormuz and drone strikes on Saudi oil facilities last September. These have provided some support to oil prices since mid-2019, alongside Opec+ [Organization of the Petroleum-Exporting Countries and its allies] supply cutbacks and an improving outlook for demand. Today Brent was up 4 percent, to over $69 per barrel, and potential supply disruption from further escalation poses an upside risk to oil prices in the short-term, notwithstanding the spare capacity cushion created by the Opec+ cutbacks,” Oxford Economics senior economist Maya Senussi said in a Jan. 3 report titled “US killing of Iran’s general intensifies regional conflict fears.” Ben O. de Vera
