A sense of caution is gripping peso bulls as markets approach the Philippine central bank’s interest-rate decision.
Increased speculation that the Bangko Sentral ng Pilipinas will ease monetary policy on Thursday is threatening to break the peso’s Asia-beating rally this quarter. A reduction in the benchmark rate could give foreign investors – who already don’t seem too keen on buying Philippine bonds – a reason to sell local debt.
A rate cut “will likely see a corresponding correction in local bond yields, which in turn would limit gains from carry trade as interest-rate differentials tighten,” said Nicholas Mapa, a senior economist at ING Groep NV in Manila. “A possible reversal in BSP’s stance is likely to see the rally fade, with the peso expected to move back to middle of the pack” in Asia, he said.
The risk of bond outflows, along with headwinds from rising oil prices and a seasonally strong dollar, are seen reversing the peso’s 1.3 percent advance against the greenback this quarter, with ING predicting it will weaken to 53.18 per dollar by end-June. The currency was at 51.850 on Friday.
Foreigners bought a net $3.9 billion of peso bonds in 2018 – a record in Bloomberg-compiled data going back to 2000 – as the BSP hiked rates by 175 basis points. A reduction is “just a matter of timing,” Governor Benjamin Diokno said late last month. The central bank will reduce its benchmark rate by 25 basis points to 4.50 percent on Thursday, according to the median estimate in a Bloomberg survey.
The peso has rebounded almost 5 percent from a 13-year low in October, thanks to a slew of economic reforms, slowing inflation and plans to boost infrastructure spending. But while improving fundamentals saw S&P Global Ratings upgrade the Philippines’ sovereign credit rating on Tuesday, adding to the peso’s gains, analysts see little further impact on the currency.
“The rating upgrade is positive news, but other drivers such as the broad USD picture, rate cuts and oil prices will be more dominant,” said Irene Cheung, a senior strategist at Australia & New Zealand Banking Group Ltd. in Singapore. “In the near term, we see PHP losing some momentum.”
The peso will weaken to 52.7 per dollar by end-June, according to a Bloomberg survey.
“There is historical evidence of a seasonally strong dollar in May,” said Maximillian Lin, emerging-markets Asia strategist at NatWest Markets in Singapore. Rate cuts “may lead to higher borrowings and widen the current account, putting pressure on the currency.”