Photo source: bag.org.ph

In an unfolding scenario, the Philippine peso encountered a decline, slipping below the P56:$1 mark amid encouraging data from the United States. Despite the central bank’s proactive interventions to stabilize the currency through spot market actions, the peso continued to slide on Monday, August 7.

Based on figures shared by the Bankers Association of the Philippines, the local currency weakened to P56.02 from its earlier closing rate of P55.74 on Friday, translating to a reduction of P0.28. The peso touched its lowest point of P56.06 on Monday, with an initial opening at P55.65. Concurrently, the weighted average rate shifted from P55.743 to P55.675, and the exchange rate volume observed a decrease from $1.138 billion to $973 million.

BDO Unibank Inc. Research analysts, drawing insights from Reuters, attributed the rise of the US dollar to a mixed US jobs report and expectations surrounding the forthcoming release of US inflation data. This upward momentum follows the peso’s earlier breach of the P56 threshold in mid-June this year, after peaking at P54.38 in mid-July.

Image source: INQUIRER.net  (Official FB Page)

As market watchers await the approaching monetary policy gathering scheduled for August 17, the Bangko Sentral ng Pilipinas (BSP) is predicted to sustain a steady exchange rate stance. While conjecture about a potential rate hike persists, some experts suggest that the BSP could maintain its current stance and abstain from raising rates.

BSP Governor Eli M. Remolona underscored the pivotal role of the central bank’s efforts in instilling market confidence leading up to the policy meeting, influencing the peso’s trajectory against the US dollar. He emphasized the peso’s movement is closely tied to the BSP’s forward guidance and its ability to uphold a substantial interest rate differential between the recently elevated US Federal Reserve rate (5.25 percent to 5.5 percent) and the BSP’s own rate of 6.25 percent. Importantly, the BSP has maintained its policy stance without change in the last two Monetary Board meetings.

Although the BSP generally regards a 75 to 100 basis points interest rate differential as acceptable, the market occasionally favors a wider range of up to 150 basis points. Remolona noted that in spite of the recent US rate increase, the peso has displayed stability within the P54 to P55 range.

Image source: INQUIRER.net  (Official FB Page)

BSP officials have emphasized their readiness to employ various tools, including adjustments to open market operations, to effectively manage inflation, liquidity, and market rates. Recent additions to the BSP’s toolkit, such as introducing a 56-day new tenor in the BSP Securities Facility and offering full allotment of overnight reverse repurchase to banks, aim to enhance the transmission of monetary policy.

These enhanced policy instruments are poised to bolster the BSP’s capability to navigate market responses and sentiments in the aftermath of a US policy rate alteration, which usually precedes a BSP reaction by two to three weeks.

Despite these developments, the BSP continues to allow the peso to follow market fundamentals, giving priority to inflation expectations when assessing exchange rate sensitivity. The peso’s exchange rate with the US dollar experienced considerable volatility from June to October of the previous year, prompted by assertive rate hikes by the US Federal Reserve.

However, a sense of stability emerged in the latter part of 2022, attributed to inflows and the BSP’s similarly robust tightening measures aimed at curbing high inflation. The peso rebounded from its historical low of P59 in September and October, establishing a trading range of P54 to P55 in recent times.

Photo source: Bangko Sentral ng Pilipinas Official Facebook Page

In response to the peso’s depreciation, the BSP implemented revisions to its foreign exchange regulations, aiming to enhance liquidity in the spot market. This step underscores the central bank’s commitment to sustaining stability and fostering resilience within the Philippine economy.

In summary, the recent depreciation of the Philippine peso, fueled by a strengthening US dollar, has triggered diverse reactions from financial experts and policymakers alike. As the central bank walks the tightrope between stabilizing the exchange rate and addressing inflation concerns, market participants eagerly await the outcome of the forthcoming monetary policy meeting, poised to shape the peso’s trajectory in the weeks ahead.