Peso seen to weaken further

Posted at 02/01/2014 9:43 AM

MANILA, Philippines - The peso is expected to weaken further in the coming months as financial markets adjust to the US Federal Reserve’s reduction in monthly asset purchases.

In a research note, Bank of the Philippine Islands lead economist Emilio Neri Jr., said the peso may continue depreciating against the greenback through May “as the market aligns with the rest of the EM (emerging market) currency space to adjust to the reality of Fed taper.”

“A mild rebound could help bring the market back to 45.40 by the end of 2014,” he added.

The Fed in December finally announced it would start winding down its $85 billion worth of bond purchases to $75 billion starting January.

This was followed by a US central bank announcement last week that the purchases would be further reduced to $65 billion starting February.

Neri, however, is confident that the fall of the peso would be tempered by the intervention of the Bangko Sentral ng Pilipinas.

“BSP’s direct intervention in the spot market to temper peso depreciation, combined with backdoor tightening measures... have a tightening impact on domestic liquidity and put upward pressure on market rates,” Neri said.

More importantly, with inflation expected to remain manageable and within the three-to five-percent target range, the BSP may opt to keep its key policy rates steady in the first half of the year.

“While still not our central scenario, rising inflationary expectations could compel the BSP to hike its SDA rate by 50 bps (basis points) to signal its desire to keep headline inflation well-anchored to meet its two-to four-percent inflation target for 2015,” he continued.

The central bank expects inflation to average 4.5 percent this year before decelerating to 3.2 percent in 2015.