As foreign exchange traders shift their books to bet on interest-rate cuts, the Philippine peso looks set to emerge as a winner: historically it’s been the least affected by monetary easing among Southeast Asian currencies.
(Bloomberg) — As foreign exchange traders shift their books to bet on interest-rate cuts, the Philippine peso looks set to emerge as a winner: historically it’s been the least affected by monetary easing among Southeast Asian currencies.
That’s the takeaway from a Bloomberg correlation analysis that showed that the peso has tended to weaken less than peers or even rises during rate easing cycles, according to data going back to 2007. Supporting the Philippine currency now are interest rates that are the highest in the region after the local central bank tightened policy aggressively to fight inflation.
This has left the Philippines with a buffer over Federal Reserve rates that also bolsters the peso. And a constant stream of remittances from Filipinos working overseas is a positive factor as well as the foreign earnings are converted into the Philippine currency.
On average over four easing cycles since 2007, the peso had a monthly correlation of minus 0.3 to Philippine policy rates. By contrast, similar readings for the ringgit, baht and rupiah relative to their respective benchmark rates were positive — suggesting that as domestic rates were cut, those Southeast Asian currencies weakened against the greenback.
The peso is forecast to rise to 54 per dollar in the fourth quarter and 52.9 next year, according to a Bloomberg survey of analysts, from around 56.2 on Wednesday.
Bangko Sentral ng Pilipinas has historically maintained a buffer over Federal Reserve rates — an average gap of around 300 basis points for policy-easing cycles since 2007. BSP Governor Felipe Medalla in May signaled that the benchmark rate should be at least 100 basis points higher than the US equivalent. And indeed the gap between the Philippine rate and the upper bound of the Fed fund rate is currently at 1 percentage point.
One thing in favor for the peso is that the central bank isn’t likely to cut rates before others.
“A reduction in local policy rates only happens in an environment of a relatively stronger or stable peso exchange rate,” said Michael Ricafort, chief economist at Rizal Commercial Banking Corp. in Manila. “A stable peso matters as it is the current administration’s number-one policy priority to bring down inflation.”
The peso may also be less sensitive to interest rate changes due to the lower foreign ownership of local currency bonds compared with neighboring countries. Global funds owned 2.3% of peso government bonds outstanding at the end of 2022, according to updated data from the Asian Development Bank. That same figure was at least 15% for both Malaysia and Indonesia, and 13% for Thailand.
The Philippine currency is buoyed as well by money sent home from Filipinos working abroad, a trend that is less pronounced for its regional peers. The nation saw remittances totaling $33 billion in 2022, which is around 8% of gross domestic product. That’s the highest share of the economy among major Asian nations, according to a World Bank report published November 2022.
Note: Calculates monthly correlation between an easing local policy rate and the Southeast Asian currency
More stories like this are available on bloomberg.com
©2023 Bloomberg L.P.