THE PHILIPPINE PESO could sink to as low as P62 per dollar this year as a dovish central bank and increased liquidity in the financial system weigh on the currency, Bank of America (BofA) Global Research said.
“We believe policy desire for easier financial conditions remains a negative for the peso,” it said in a report.
BofA forecasts the local unit to hit P61 against the greenback in the first quarter, and to fall to P62 in the second and third quarters.
It said the peso could return to P61-per-dollar mark in the fourth quarter.
“Despite the decision to hold rates, the Bangko Sentral ng Pilipinas (BSP) maintained a dovish guidance with possibility of further rate cuts this year and followed that guidance recently with large liquidity injections through the reserve requirement ratio (RRR) cut,” BofA said.
The central bank’s easing trajectory will be “bearish” for the peso, it added.
While the BSP unexpectedly kept interest rates steady at its rate-setting meeting last month, BSP Governor Eli M. Remolona, Jr. has said the central bank is still in its easing cycle.
He signaled the possibility of up to 50 basis points (bps) worth of cuts this year, though not necessarily at every meeting or every quarter.
BofA noted the recent liquidity injection arising from the RRR cut could also influence the peso’s performance.
The BSP last month announced it will slash big banks’ RRR by 200 bps to 5% from the current 7%, effective March 28.
Digital banks’ RRR will also be reduced by 150 bps to 2.5% and thrift lenders by 100 bps to 0%.
Analysts have estimated that between P300 billion to nearly P400 billion in liquidity could be infused into the financial system following the RRR cut.
The country’s wider current account (CA) deficit could also impact the currency, BofA said.
“The other factor driving US dollar demand has been the widening CA deficit seen over the last year which leaves a funding gap.”
Earlier data from the BSP showed the current account deficit stood at $12.9 billion in the first nine months, equivalent to 3.9% of gross domestic product (GDP).
“However, a more defensive stance from BSP supported the peso as the funding gap was met with a drawdown of reserves. Historically, BSP’s worries about weaker FX (foreign exchange) have been more tied to the inflation pass-through. But low inflation currently and lower imported prices would mean that persistent smoothing is unwarranted,” it added.
The peso closed at P57.90 per dollar on Monday, strengthening by 9.5 centavos from its P57.995 finish on Friday.
The peso hit the all-time low P59-per-dollar level thrice last year amid the dollar surge. It has yet to breach this record low.
However, BofA said the peso weakness will be “partly offset by BSP’s defensive smoothing flows and lower oil prices.”
The BSP has said it intervenes in modest amounts to curb speculation and keep markets orderly.
“We recommend hedging the peso, as hedging costs remain low, and we expect the peso to trade weaker due to US dollar strength and dovish BSP,” it added. —Luisa Maria Jacinta C. Jocson
