#Throwback2014: Peso remains stable in the year of the dollar

2014 has been the year of the dollar, with investors watching closely as the US Federal Reserve cuts back its $85-billion monthly bond purchases that were meant to support the world's largest economy.

 

And as the massive bond-buying program, also know as quantitative easing, was scheduled to end later in the year, market players kept their guards up as the US central bank may come out with a decision on the fate of interest rates.

 

Higher US interest rates could spark a capital flight from emerging markets back to the US to look for higher yields in Treasury bonds, supporting the dollar and dragging other currencies lower, including the Philippine peso.

 

Fed’s decision to end its quantitative easing is one of the biggest developments that rattled not only the peso but also the global currency markets, Security Bank Corp. economist Patrick Ella said.

 

“The problem with the peso is, even if we’re showing good fundamentals, we still have no choice but to follow global developments,” he said.

 

But despite the volatility in the currency markets, the peso remained stable, thanks to the Philippines' good fundamentals and strong remittance inflows.

 

Tight range

 

The peso-dollar exchange started the year at P44.45:$1, coming from the year when the Fed announced it will start scaling back its monthly bond purchases in January 2014.

 

And so far, the peso has traded within a tight range of P43.235:$1 to P45.29:$1, a movement of 4.54 percent or 2.055 centavos for the whole year.

 

Bank of the Philippine Islands (BPI) economist Nicholas Mapa said the peso's tight trading is relatively a rare case in the emerging market space.

 

“Stability in the exchange rate is vital for businesses and for planning as they are able to make economic decisions on a rather stable variable,” he said.

 

“The peso, by virtue of its current account surplus and GIR has been able to smooth out the ebb and flow of exchange rate volatility,” he added.

 

In the third quarter, the Philippine current account surplus improved by 14.7 percent to $3.037 billion surplus from $2.647 billion a year earlier due to remittances and narrower trade deficit. The current account is a component of the BOP, which measures a nation’s transactions with the rest of the world.

 

While Philippine gross international reserves (GIR) slightly dipped to $79 billion in November from $79.4 billion a month earlier, it remains enough to cover imports of goods and payments on services and income for 10.7 months, the Bangko Sentral ng Pilipinas (BSP) said.

 

More stable than peers

 

Compared to peer currencies, the peso was stable and depreciated less at about less than 1 percent, Security Bank first vice president for treasury Andre Ibarra III said.

 

As of December 23, the peso softened by 0.64 percent when it closed P44.68:$1.

 

In Southeast Asia, the biggest loser against the dollar is the Malaysian ringgit which fell by 6.34 percent, followed by the Singaporean dollar which eased by 4.56 percent and the Indonesian rupiah with a 2.47 percent decline, data from Reuters show.

 

The sharper swings in other currencies can be attributed to the actions of their respective central banks, BPI's Mapa said.

 

“Unlike other central banks who in 2013 had to resort to hiking interest rates to defend their currency, the BSP was able to put off hiking to 2014, but more so to combat inflationary expectations, its true mandate,” he noted.

 

The BSP first raised its policy rates by 25 basis points from record lows in July as a preemptive response to signs of inflation pressures. Prior to that, the central bank hiked the reserve requirement for thrift banks by 2 percentage points and the yields of its special deposit accounts (SDA) facility by 25 basis points. 

 

Thailand's central bank started tweaking policy rates lower in May 2013 while Indonesia's begun hiking key rates in June 2013.

 

Economic improvement

 

After disappointing first half economic data from the US – mainly due to the extreme cold weather situation at the start of the year, MetisEtrade Inc. research analyst Guaya Yroen Melgar  said the dollar started to gain ground in the second semester as the US labor market showed signs of recovery and different sectors in the US started growing faster. 

 

This economic improvement divided Fed officials as to when they should start raising rates, especially after the central bank's bond-buying program officially ended in October.

 

“This sign of recovery from the US supported the demand for riskier investments, such as those in emerging markets,” Melgar said.

 

After the end of the QE program, among the big market-movers being anticipated is the interest rate decision from the US Fed,” she added.

 

While the Fed did not give a clearer outlook on the US interest rates in its last meeting for the year, the central bank was sure that the world's largest economy is on track for recovery.

 

As currency players have something big to watch out for in 2015, ING Bank Manila senior economist Joey Cuyegkeng, who expects the peso to end at P44.70:$1 this year, anticipates further peso depreciation of 2 percent next year and 3 percent in 2016.

 

“The timing of the weakness depends on firmer market expectation and guidance about the first policy rate hike by the Fed. If global growth concerns eventually affect the strength of the US recovery, then the likelihood of a delay of the first Fed rate hike to 2016 may result to a 2015 year-end rate that is not significantly different from where it trades now,” he said. — JST, GMA News