British banking giant HSBC said the Bangko Sentral ng Pilipinas (BSP) would continue to defend the peso to keep it below the 57 to $1 level.
Lenny Jin, global foreign exchange strategist at HSBC, said in its latest currency outlook titled 'PHP: Defense Continues, But With Conditions' that the peso has been largely trading within the 56.50 to 57 range.
'For now, we expect USD-PHP to stay around 57 over our forecast horizon. This view is linked to the BSP's hawkish rhetoric, the latest beat in monthly inflation, and further upside risks,' Jin said.
Last August, HSBC highlighted the likelihood that the BSP would cap the peso-dollar rate firmly below 57 as there is no obvious reason for it pair to revert lower.
Jin expects the dollar to strengthen through the end of 2024 and remain elevated near-term pressure on every Asian currency, including the peso.
The BSP usually dips into the gross international reserves (GIR) to smoothen excess volatility in the foreign exchange market.
According to Jin, the BSP's defense would be conditioned on no significant strength in nominal effective exchange rate (NEER) or the weighted average of the peso against the currencies of its important trading partners.
'If the BSP defends 57 while currencies of the Philippines' key trading partners (excluding the US) weaken, we are likely to see a higher PHP NEER, which may not be desired by the BSP when the exports sector still faces headwinds,' he said.
Jin pointed out that this is not yet a notable concern as the NEER of the peso is currently two to three percent, stronger than levels seen in October last year when the peso slumped to an all-time low of 59 to $1.
However, he explained the NEER is 1.5 to two percent weaker than levels seen around mid-July, when the BSP bought the USD to smoothen the rise of the peso.
'PHP NEER is in the middle of the smoothing range, which suggests to us that the defense at 57 will continue perhaps until we see another 1.5 to two percent strength in PHP NEER,' he said.
Jin said the strength of the greenback and limited improvement in sight for the Philippines' trade deficit mean that the peso would only find periodical reprieve when the funding sources of its trade deficit, including services surplus, remittance inflows from overseas Filipino workers, foreign direct investments and portfolio inflows, strengthen.
To tame inflation and stabilize the peso, the BSP Monetary Board raised key policy rates by 425 basis points between May 2022 and March 2023. This helped strengthen the peso back to the 53 to $1 level last February.
However, the peso almost touched the 57 to $1 when it hit an intraday low of 56.99 last Sept. 6 and Aug. 14 due to further rate hikes by the US Federal Reserve and the decision of Fitch Ratings to downgrade the credit rating of the US to AA+ from AAA.
The peso has depreciated by 1.9 percent from the end 2022 level of 55.755 to $1.
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