Peso seen testing new record lows as slow growth cements easing bets

MANILA, Philippines — The Philippine peso could weaken further against the US dollar and test new record lows in the near term, according to UnionBank of the Philippines. This, as a widening corruption scandal at home remains a “structural handicap” for the currency while geopolitical risks abroad are intensifying volatility.

In its latest MktsFocUs report, the Aboitiz-led lender said the peso could trade between 59.30 and 59.70 against the US dollar in the week ahead. Market sentiment leans toward the currency remaining “persistently weak.”

This, amid concerns that the crackdown on corruption may continue to hurt growth prospects and prompt the Bangko Sentral ng Pilipinas (BSP) to further cut interest rates. These would reduce the appeal of local assets to foreign investors.

READ: Peso continues slide, slips to new low of 59.46:$1

The pressure was compounded last week by mounting geopolitical risks, particularly escalating political unrest in Iran that sent oil and gold prices up, UnionBank added.

“Unless GDP rebounds sharply to challenge expectations of more BSP easing, near-term trading is likely to favor buying US dollar-peso on dips, with corporates increasing foreign exchange hedging throughout the year,” the bank said.

“Should geopolitical tensions escalate—potentially mirrored by the US dollar index extending gains toward 99.5 — pressure on the peso will intensify,” it added. “Tactical bias: buy on dips while hedging foreign exchange requirements this quarter.”

Last Thursday, the peso closed at 59.46 per dollar, slipping two centavos past the previous day’s record low  finish of 59.44:$1. 

Back-to-back weakest closings

The back-to-back record-low closes happened amid expectations that the US Federal Reserve would hold rates steady in the coming months. Meanwhile, geopolitical upheavals triggered capital flight to safety.

A weaker peso has mixed implications for the Philippines. It lifts the domestic value of remittances from millions of overseas workers and could make Filipino exports more competitive. At the same time, it risks pushing up import costs and reigniting inflation.

READ: Rescuing the sinking peso

Sustained depreciation could also raise the peso value of foreign debt held by the government and private firms.

The BSP had said it will let market forces largely determine the exchange rate. It would step in only if a prolonged slide threatens imported inflation as opposed to smoothening daily swings.

The central bank appears willing to tolerate some currency weakness as it nears the end of its pro-growth easing cycle. BSP Gov. Eli Remolona Jr. indicated that the cycle could conclude with a single additional rate cut — possibly in February — unless “bad surprises” warrant further reductions.

Amid geopolitical risks reinforcing the interplay of higher oil prices and a weaker peso, UnionBank said a BSP signal to revoke its rate-cut pledge in next month’s Monetary Board meeting would be positive for the peso, This would reflect a renewed focus on inflation risks.

Nonetheless, the bank expected governance concerns and geopolitical spillovers to continue to weigh on the local unit. The next resistance level is seen at 59.50:$1.

“Beyond inflationary pressures, elevated oil prices risk widening the trade deficit, exerting direct downward pressure on the peso,” UnionBank said. “Historically, such dynamics signal a sell bias for local currency assets.” INQ