Peso seen weakening to 42 to $1 in 4th quarter

Despite a trend of strengthening that has led the peso to another four-year high last week, the local currency is expected to weaken throughout the remainder of the year before picking up again back to less than 42 to $1 for the most part of 2013.

DBS Group said in its latest quarterly report on market strategies that the local currency was seen trading against the dollar at P42.60 by year’s end. The peso posted a record 41.56 to $1 last September 11.

But on a wider horizon, the Singaporean financial services provider described the peso’s performance against the greenback to be stable between 41.20 and 43.80 to $1 in the next few months owing to favorable economic fundamentals.

“The (dollar-peso) is the only currency pair in Asia, excluding Japan, that fluctuated in a descending price channel throughout the eurozone crisis,” DBS said. “This channel should remain intact for the rest of 2012.”

It noted that 2012 has so far been a relatively favorable year for the Philippines compared to 2011. In particular, economic growth went faster while inflation eased, enabling both monetary and fiscal authorities to focus on addressing threats to domestic economy from a tepid global market.

“Investors were rewarded with a stable-to-stronger exchange rate, a record-high stock market, and all-time-low government bond yields,” DBS said.

Moreover, “worries over the wider fiscal deficit this year were assuaged by a single-notch upgrade in the country’s sovereign debt rating to BB+ by Standard & Poor’s in July,” it added.

Still, the group noted a need to guard against complacency and the possibility that the current economic resilience “can become unsustainable.”

Also in July, the DBS said the Bangko Sentral ng Pilipinas’ move to exclude foreign funds from the country’s special depository account (SDA) facility showed that it was worried about the strength of the peso.

Back then, DBS said there were also concerns that export competitiveness might be an issue as export growth in the second half could face considerable head wind given a further slowdown in the developed economies.

In July, the Monetary Board decided to require banks placing funds in the SDA facility of the central bank to submit a notarized certification saying that the money came only from investors residing in the country.

BSP Governor Amando Tetangco Jr. explained that the SDA facility was meant solely to prevent too much money from circulating within the economy and should not accommodate speculative funds from abroad.