Peso seen slipping back to 42:$1 level

The peso is expected to stay in the 42-to-a-dollar territory for the rest of the year as efforts of the central bank to curb speculation are seen tempering the strong demand for peso-denominated assets.

This was according to the “Market Call,” a joint monthly publication of First Metro Investments Corp. and the University of Asia and the Pacific, which said in its latest issue that there is scope for the peso to slightly depreciate to the 42 level as a consequence of regulation.

For example, the Bangko Sentral ng Pilipinas has prohibited banks from investing foreign funds in the special deposit account (SDA) facility, which is one of the most attractive risk-free investment outlets available in the country.

The BSP said its SDA facility, through which banks may place money and earn interest, is meant only to siphon excess liquidity within the economy to manage inflation.

Therefore, the BSP said, foreign funds have no place in its SDA facility.

Prior to the latest regulation of the BSP on SDA, funds placed in the facility stood at nearly P1.7 trillion.

The move of the BSP is seen to curb speculation, which was partly blamed for the appreciation of the peso.

The local currency strengthened back to the 41-to-a-dollar level in July to hit a four-year high.

The recent rise of the peso was also due to the country credit rating upgrade from Standard & Poor’s.

S&P raised the Philippines’ credit rating from two notches to just one notch below investment grade, citing favorable macroeconomic fundamentals.

Besides legitimate investments, the Philippines was said to have attracted speculative funds.

Foreign funds were said to be being invested in the peso and short-term peso-denominated assets, such as the SDA, to earn from speculation of further rise of the currency’s value against the greenback.

The Market Call, however, said regulatory control imposed by the BSP against foreign investments in SDA will likely trim overall demand for the peso.

Consequently, the local currency may slightly depreciate, it said.

“[Prohibition] of foreigners to directly or indirectly place funds in the BSP’s SDAs would provide a basis for a slight depreciation bias of the peso in the second half,” Market Call said.

The move of the BSP last month to cut its key policy rates, which influence commercial interest rates such as yields of securities, by another 25 basis points will also temper demand for peso-denominated assets, it added.

The cut brought the central bank’s overnight borrowing and lending rates to new record lows of 3.75 and 5.75 percent, respectively.

The peso closed at 41.885 on Friday.