Oxford Economics, a UK-based economic forecasting agency, said Tuesday it expects the peso and other Asian currencies to trade weaker in the fourth quarter on possible more US Federal Reserve interest rate hikes.
“We believe Asian FX [foreign exchange] will continue to weaken versus the US dollar for the remainder of this year. Markets are now expecting the US Fed to raise rates further, while the risk premium will rise as global growth weakens. However, we believe significant weakness in Asian currencies is unlikely, given current account buffers, softer oil prices and disinflation helping rebuild real yields in the region,” it said in a report.
It expects the peso to fall from 55.27 against the US dollar as of end-second quarter to 56.70 in the third quarter and 57.00 in the fourth quarter.
The peso settled at 55.23 against the greenback Tuesday.
The think tank said the market expectation of US rate hikes in the second half sparked the US dollar resilience.
Fed Chair Jerome Powell pointed out that at least two more hikes in the second half would be necessary to bring down US inflation to the official 2 percent target, further fueling rate hike expectations.
“Rising odds of a US recession and emerging signs of a global economic slowdown as monetary
conditions tighten might also be a major incentive to buy US dollars,” it said.
It said the FX market has rewarded the central banks of Asian economies with high-yielding currencies for pushing rates higher to fight inflation and stabilize currencies.
“Twin deficits in the Philippines and India will also negatively expose their currencies to a jump in
risk aversion in a global downturn. Another reason we are cautious towards the peso is its high inflation reading of 6.1 percent year-on-year in May, which sits above its official 2 percent to 4 percent target,” Oxford Economics said.