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Thursday, April 18, 2024

Peso bulls face disappointment as headwinds for currency mount

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The Philippine peso will struggle to repeat its strong year-end performance as overseas remittances fade and the nation’s current-account deficit weighs.

Money sent home by overseas workers typically drops after the year-end holidays, while the central bank forecast last month that the current-account gap for 2023 will be similar to the $20.5 billion seen last year. With the dollar showing strength, risk-sensitive currencies like the peso will come under pressure.

“There could be some seasonal healthy upward correction in the US dollar/peso in the first quarter as the increase in holiday spending is already done and over with,” said Michael Ricafort, chief economist at Rizal Commercial Banking Corp. in Manila. The pair may range from 55.50-56.50 this quarter, he said.

Traders will be monitoring data this week on the trade balance, which feeds into the nation’s current account, with economists expecting the deficit to widen by almost a third to $4.5 billion for November. The median forecast of analysts surveyed by Bloomberg shows the Philippine currency will weaken slightly to 56.3 versus the dollar by the end of March.

The peso ended Friday at 55.640 versus the dollar, and had posted a 5.1-percent gain in the fourth quarter, its best advance since 2010. Still, that was less than half the rallies for Asia’s best-performing currencies, the South Korean won and the Japanese yen in that period.

Remittances in 2021 had peaked at almost $3 billion in December, before dropping to $2.7 billion the following month. The latest available data show cash sent back from overseas workers had touched $2.9 billion in October 2022.

Technical limits

Technically, two key levels of resistance for the peso, around its 200-day moving average and its July high, have converged and are acting to rein in the Asian currency.

If the peso fails to break through those levels, something it couldn’t do decisively in the last three months, then any upside potential looks minimal at best.

Given all these headwinds, any hopes of the peso advancing further may quickly evaporate if US economic data spur the Federal Reserve to raise rates by 75 basis points this year as indicated in its dot plot.

“The outlook for USD/PHP will hinge on the broad USD picture, which carries much uncertainty as the outlook for inflation in the US is still unclear,” said Irene Cheung, an FX strategist at ANZ Banking Group in Singapore.

Image credits: Aldar Darmaev | Dreamstime.com

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