Philippine Peso to Extend Slump to Record Low on Rate Cut Bets

(Bloomberg) -- The Philippine peso looks set to extend its slump toward a record low as investors see the nation’s central bank cutting interest rates ahead of the Federal Reserve.

The peso has hovered around its 2022 low of 59 per dollar for most of June and has weakened almost 6% this year. Bearish sentiment is intensifying after Bangko Sentral ng Pilipinas signaled last month that rate cuts may begin as early as August, as some strategists see the currency weakening to 60 by the end of the year.

Philippine’s central bank stands in contrast to its peers in Asia, which remain hawkish as the region’s currencies decline this year. Further weakness in the peso may reverberate in the economy, with inflation a key risk as the nation imports goods such as rice and almost all its oil requirements.

The level of 60 “is a risk that cannot be ruled out given the BSP’s pushback against hikes, recalcitrant Fed restraint, twin deficits and China risks,” said Vishnu Varathan, Singapore based chief Asia ex-Japan economist at Mizuho Bank Ltd. The peso closed at 58.65 per dollar on Friday.

Much will depend on how aggressively the BSP will intervene, after it successfully defended the 59 level for months in late 2022, spending billions of its foreign-exchange reserves. Authorities also sold dollars last month, in a bid to curb a decline in the peso, however Governor Eli Remolona said that the bank doesn’t intervene every day and will only do so when the market is “under stress.”

Weakness in the peso is also piling pressure on inflation as companies pass on to consumers higher costs of raw materials. While the BSP contemplates rate cuts, Remolona has also opened the door to other forms of monetary policy such as a reduction in the banks’ reserve ratio, which may further weigh on the currency if the move is interpreted as dovish.

Monetary policy divergence between the Fed and the BSP could drive the peso “to as low as 60 by end of this year,” said Lloyd Chan, Singapore based FX strategist at MUFG Bank Ltd. Barclays Bank Plc. also sees a possibility of the currency testing that level in the long-term.

Peso investors will be looking to see if overseas remittance data on Monday can provide some welcome respite for the currency. But 2023’s flows indicate there’s little chance of that occurring, as remittances reached the lowest levels of that year in April and May.

Here are the key Asian economic data this week:

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