Peso to weaken before firming up in the 2nd semester

MANILA, Philippines – The peso's recovery push against the dollar from last year’s multi-year lows may face headwinds this year from a worsening global economic landscape and expectations of more rate cuts by the policy-making Monetary Board. Still, the local currency will cap 2009 on a strong note, with the most optimistic forecast at P45 per dollar by yearend and the low-end at P48 per dollar, according to a BusinessWorld poll of nine banks. Analysts were of the consensus that the peso, which bounced back in December from a protracted weakness brought on by the US-led credit crisis, will come under renewed pressure in the first half of this year. The traditional surge in remittances in December gave the peso enough cushion against a free fall, but the local currency ended still 2008 weaker by 13 percent from a year ago. The drop, while tracking regional currencies that similarly weakened last year, was a sharp reversal from the 18 percent gain the peso recorded in 2007, when it became Asia’s best performing currency. Unabated fears of a steep US recession that will drag economies elsewhere, including the Philippines, would have risk-averse investors scrambling for safe-haven assets such as the dollar in the next three to six months, analysts said. That could pull the peso down to a P50-P52 per dollar range in the first half as a result. "The US dollar remains a safe haven currency as long as there’s global risk aversion. It will remain strong in the short term," said Paul Joseph M. Garcia, chief investment officer of ING. "The reason for the recent strength of the peso are remittances. But by this month, it will dry up a bit. For us to confirm that the dollar bull run is not yet over, it should trade past the P48 levels, which is the resistance. Once you see a break in that level, that’s the time we can say the dollar strength will resume. So my bias is toward a weaker peso at least in the first quarter," a trader said. Most crucial to the movement of the exchange rate is the direction of domestic interest rates, said Rafael S. Algarra Jr., Security Bank Corp. treasurer. The US Federal Reserve’s move to bring its federal funds rate to near zero has made the high-yielding peso-denominated assets more attractive. But the wider interest rate differential won’t hold up for long, with the Bangko Sentral ng Pilipinas (BSP) widely expected to give its recent aggressive 50-basis-point cut a follow-through. Also, lower interest rates, which some believe could even break the central bank’s record low of 4.125% for the overnight borrowing rate seen in 1992, are feared to prompt speculative attacks on the peso. "US dollar rates can’t get any lower and it will help the peso. But the rate-cutting scenario in the Philippines should probably continue. The speed of the rate cut by the BSP will be what everybody will be watching out for in 2009," Mr. Algarra said. "Interest rates are definitely in favor of the peso because the dollar won’t yield anything. But the focus of the market is back to growth, exports heading south, overseas Filipino workers being laid off so that there is a question of where will the inflows come from. From that angle, the peso will depreciate," a trader said. Early signs of a recovery in the global economy toward the end of this year, however, should prop up the peso by the second semester, analysts said. "We expect dollar strength to be unsustainable. It will weaken once we see a clear sign of a global economic recovery which may happen towards the second half of 2009," Mr. Garcia said. Lower import bills, mainly on the back of falling global crude prices, meant lower demand for dollars and should the peso extra push, analysts said. "Easing global oil prices give no reason why the peso should remain weak," Pascual Garcia III, president of the Philippine Savings Bank (PSBank), said. Maria Eloisa I. Calderon, BusinessWorld