The peso climbed to an 18-month high to return within the 50-a-dollar level, drawing strength from foreign inflows as investors bet on the stock market’s rally.
The peso gained P0.10 to close at 50.90 from 51 per US dollar Monday. It was the local currency’s strongest finish since it settled at 50.84 per greenback on Jan. 26, 2018. Total volume turnover hit $1.045 billion Tuesday, up from $744.96 million Monday.
Nicholas Antonio Mapa, a senior economist at ING Bank Manila, said expectations on a rate cut by the US Federal Reserve in July coupled with market’s anticipation of a possible cut or two from the Bangko Sentral ng Pilipinas in the third quarter had boosted investors’ hopes for strong growth after the speed bump in the first quarter.
“With BSP dialing back its 175 bps rate hike to some extent, growth is seen to recover as the economy finally fires on all cylinders again especially with government spending on catch-up mode,” Mapa said.
The gross domestic product growth slowed to 5.6 percent in the first quarter from 6.5 percent a year ago and 6.3 percent in the first quarter on the lingering impact of delayed budget approval and what Mapa described as “BSP’s ultra-aggressive rate hike in 2018.”
“Trend can continue but the fate of this rally depends on the direction and pace of foreign investor flows,” Mapa said.
He said a strong economic performance could get investors believing in the economic prospects of the Philippines again, but any deviation in global market sentiment such as the resumption of concerns on global growth or disappointment from the Fed “could stall this rally or even cause the market to move the opposite direction.”
Bangko Sentral Governor Benjamin Diokno said last week there were two options on the part of the Fed: a 25-bps cut or a 50-bps cut. “But definitely it will cut,” Diokno said in an interview.
He said that “even before the decision of the Fed, we are already committed to cutting [the policy rates],” reiterating his previous statement that the board might reduce the interest rate first before it would touch the reserve requirement.
The Monetary Board will hold its next policy meeting in August. Diokno said that by that time, there would already be additional information on the inflation rate and the second-quarter GDP growth.
Fitch Solutions Macro Research said the peso’s recent appreciatory run would likely bounce off resistance in the near term as the benefits from external tailwinds fade.
“Following dovish tilts from the Federal Reserve and the European Central Bank in June the peso has strengthened, benefiting from a wider rally across risk assets on US dollar weakness,” Fitch Solutions said.