Peso seen to move sideways as hawkish Fed props up dollar

THE PESO may move sideways versus the dollar this week following the Philippine central bank’s decision to raise borrowing costs, expectations of more aggressive tightening by the US Federal Reserve to fight inflation, and as the market awaits the incoming administration’s economic plans.

The local unit closed at P52.23 per dollar on Friday, gaining 22 centavos from its P52.45 finish on Thursday, according to data by the Bankers Association of the Philippines.

Week on week, the peso also strengthened by 22 centavos from its P52.45-perdollar close on May 13.

The peso opened Friday’s session at P52.30 versus the dollar. Its weakest showing was at P52.37, while its intraday best was at P52.11 against the greenback.

Dollars exchanged increased to $1.29 billion on Friday, from $1.11 billion on Thursday.

The peso strengthened versus the dollar on Friday after the central bank raised benchmark interest rates, UnionBank of the Philippines, Inc. Chief Economist Ruben Carlo O. Asuncion said in an e-mail.

The BSP raised benchmark interest rates for the first time since 2018 to tame rising inflation.

The Monetary Board on Thursday increased the key policy rate by 25 basis points (bps) to 2.25%. Interest rates on the overnight deposit and lending facilities were also hiked by 25 bps to 1.75% and 2.75%, respectively.

At the meeting, the central bank upwardly revised its average inflation forecast for 2022 to 4.6% from the previous forecast of 4.3%, exceeding the 2%-4% target band. For 2023, the BSP’s inflation forecast was hiked to 3.9% from 3.6% previously.

The start of the BSP’s tightening cycle came a week after the release of data showing gross domestic product expanded by a better-than-expected 8.3% in the first quarter.

Meanwhile, Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort said in an email that the market also factored in the gains in the stock market.

The local unit was also stronger after the recent downward correction in the benchmark 10-year US Treasury’s yield, Mr. Ricafort said.

For this week, expectations that the Fed would tighten more aggressively until inflation is brought down could cause the peso to weaken, Mr. Ricafort said, with increased sanctions on Russia and some lockdowns in China seen to slow down global economic recovery.

Mr. Asuncion said the dollar is seen to be supported by the Fed’s hawkish stance as the US central bank is expected to front-load its planned rate increases to fight stubbornly-high inflation, with the minutes of its latest meeting to be released this week seen to give more details on its tightening path.

Mr. Ricafort and Mr. Asuncion said the market is also waiting for the next administration to detail their policy agenda and priorities.

After his landslide presidential election win, Ferdinand “Bongbong” R. Marcos, Jr. now faces soaring inflation and limited revenue to achieve his ambitious infrastructure goals, Bloomberg reported.

Several names and figures have been floated as potential appointees to the new economic team, though no official announcements have been made.

For this week, Mr. Asuncion gave a forecast range of P52.20 to P52.70, while Mr. Ricafort expects the local unit to move within P52.05 to P52.40 per dollar. — K.B. Ta-asan