Think tank: Expect peso weakness when the US Fed starts ‘tapering’

Asian currencies, including the Philippine peso, would further weaken against the US dollar when the US Federal Reserve begins to cut down its securities and bonds purchases, UK-based think tank Oxford Economics said.

But Oxford Economics lead Asia economist Sian Fenner said the expected depreciation in regional currencies this time won’t be as bad compared to the Fed’s “taper tantrum” of 2013.Oxford Economics projected the US Fed to start tapering on asset purchases by November, which, in turn, would “dampen enthusiasm on Asian foreign exchange in the short term, as the US 10-year treasury yield moves higher.”

The Fed has been on a buying spree in recent months as it targeted to push down long-term interest rates while pacifying banks uneasy with lending to consumers. Tapering means the Fed is ready to reduce this pandemic stimulus.

Due to their current account deficits, the Philippines’ peso, India’s rupee, Indonesia’s rupiah and Thailand’s baht were projected to depreciate against the greenback in the short term, Oxford Economics said.

As of end-June, the Philippines’ current account, or the sum of the economy’s transactions with the rest of the world, reverted to a deficit equivalent to 0.7 percent of gross domestic product.

“Structural current account deficits in Indonesia, India and the Philippines mean these economies are more dependent on foreign portfolio flows [and in the case of the Philippines also remittances] to fund their deficits … Compared to their regional peers, we believe these currencies are more vulnerable to depreciating pressures during any potential bouts of emerging market stress,” Oxford Economics said. INQ