THE recent strengthening of the peso against the US dollar on Monday highlighted the volatility of the country’s exchange rate compared to a year ago, according to local economists.
The peso strengthened against the dollar at P54.95 after only three days of closing at the P55 level. The peso opened at P55.31 to the dollar and traded at its strongest at P54.95 and its weakest at P55.32 to the greenback.
Unionbank Chief Economist Ruben Carlo O. Asuncion said year-to-date, the peso-dollar exchange rate has appreciated about 1.2 percent and depreciated about 1.2 percent for February.
“You are very correct in saying that the USD-PHP has been quite volatile, especially this month. One dominant reason that I see for this USD-PHP short-run behavior has been the responses of the US Fed and offshore markets—fixed-income, equities and forex—toward inflation and inflation expectations,” Asuncion explained.
However, Ateneo de Manila University John Gokongwei School of Management Dean Luis F. Dumlao said while the exchange rate has been “twice as volatile compared to the same month last year,” the volatility in the exchange rate was still normal
Dumlao said January was more volatile. In the last 12 months, volatility as measured by standard deviation was most volatile in June 2022 at 0.88 compared to 0.45 this February.
“I expect it to be just as normal unless an unexpected significant event happens,” Dumlao said. “[These events include] geopolitical shocks, natural catastrophes, etc.”
Meanwhile, Asuncion said other factors that have affected the exchange rate include the response of the Bangko Sentral ng Pilipinas (BSP) and local markets to investment sentiments from external markets as well as domestic inflation.
One factor affecting the external environment, Asuncion said, is the certainty of a recession. He said the question among experts is when the recession will happen and whether it will be a soft or a hard landing.
“Market players do pay attention to the interest rate differential between the US Fed and the BSP. It can impact investment decisions, therefore, impact currency inflows or outflows,” Asuncion said.
With the higher-than-expected inflation in January and the recovery of consumption spending, the BSP said it is possible for monetary authorities to further raise interest rates in the Monetary Board’s succeeding meetings.
Last week, the MB increased the BSP’s overnight reverse repurchase facility by 50 basis points to 6 percent, effective February 17, 2023, a move that was widely expected.
The BSP said the interest rates on the overnight deposit and lending facilities will be set to 5.5 percent and 6.5 percent, respectively.
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