Investment bank sees peso strengthening to 40:$1 level

The peso is still vulnerable to recurring eurozone jitters in the short run but will likely appreciate sharply next year to hit 40 to $1 as the central bank resumes a tight rein on liquidity, according to European investment bank Credit Agricole CIB.

In its Emerging Market Monthly Roadmap dated November 2, the investment bank projected that the peso could decline by 2.2 percent in the next three months but appreciate by 2.6 percent over a six-month period.

It projected that the peso would end this year at 44.7 to a greenback. The local currency closed at 42.92 to the dollar on Friday.

By next year, Credit Agricole CIB sees the peso gaining ground to hit 41.10 to $1 by June and further rise to 40.80 by September and 40.4 percent by December.

The projected appreciation to the 40 level comes alongside Credit Agricole’s expected resumption of a hawkish stance by the Bangko Sentral ng Pilipinas.

The BSP will likely keep its key overnight borrowing rate at 4.5 percent before September next year. But by September, the rate is seen being jacked up to 4.75 percent and further to 5 percent by December 2012.

Some emerging market currencies have already priced in a lot of good news, Credit Agricole CIB said, noting that in Asia, the Korean won had rebounded the most, supported by the return of foreign equity capital and solid fundamentals such as a large external surplus, decent economic growth and relatively hawkish central bank posture.

“While in the long run the [Korean] currency is one of our top picks, we believe that short-term upside is limited. The same applies to the Singapore dollar, the Malaysian ringgit and the Philippine peso. Their potential in the long run is also solid, but in the short term it should be limited, especially given that monetary policy signals are becoming less hawkish,” Credit Agricole said.

In Asia, the investment bank said some currencies have retraced more than 25 percent of their declines, including the Philippine peso, Singapore dollar and Malaysian ringgit.

“Some currencies have not recovered much so far, but we believe they could now benefit from the improved global risk backdrop,” the research said, noting that the best example among these laggards would be the Indian rupee.

In terms of the domestic economy, Credit Agricole CIB sees the Philippine GDP expanding by 4.9 percent this year and 5.1 percent next year, slowing from 7.6 percent last year.

Inflation, on the other hand, is seen rising from last year’s 3.8 percent to 4.7 percent this year before slightly easing to 4.5 percent in 2012.