Peso may end Q1 at PHP 56 a dollar amid skittish Fed easing timing

The Philippine peso may end above P56 against the dollar this quarter amid uncertainty about the timing of the US Federal Reserve’s easing cycle, according to MUFG Global Markets Research.

“We have raised our forecast for USD/PHP to P56.20 for Q1 2024, but kept our 12-month forecast at P55 for Q4 2024,” it said in a report on Wednesday.

The research firm expects the peso to close at P55.80 in the second quarter, at P55.30 in the third and at P55 in the fourth quarter.

The peso appreciated against the dollar on Wednesday after Federal Reserve Bank of Cleveland President Loretta J. Mester on Tuesday said the US economy performing as she expected could open the door to rate cuts.

But she was not ready yet to say when due to inflation uncertainty, Reuters reported.

“The peso strengthened following indications from Fed official Mester that the US central bank could consider a measured reduction in policy rates later this year, while rejecting the possibility of earlier cuts,” a trader said in an e-mail.

The peso closed at P55.95 a dollar, 25 centavos stronger than its close on Tuesday, Bankers Association of the Philippines data showed.

It opened at P56.08 strengthened to as much as P55.95 and weakened to as much as P56.12. Dollars exchanged went up to $1.29 billion from $1.26 billion on Tuesday.

MUFG Global Markets previously saw the peso closing at P55.40 in the first quarter, P55.30 in the second quarter, P55.20 in the third and P55 in the last quarter.

“In the near term, there could be some upside pressure still on the US dollar given uncertainty around the Fed’s rate path, coupled with the trajectory of global growth,” MUFG said.

Futures tied to the Fed’s policy rate late Tuesday showed investors assigning about a 20% chance of the Fed cutting interest rates in March, down from 64% a month ago, CME Group data showed.

The probability of a first rate cut coming in May, meanwhile, has increased to 55% from 37% a month ago. Investors were now pricing in a total of 122 basis points (bps) in cuts this year, from about 150 bps in mid-January, Reuters said.

The Federal Open Market Committee held its target rate steady at 5.25-5.5% for a fourth straight time at its meeting last week. It raised borrowing costs by 525 bps from March 2022 to July 2023.

While inflation settling within the Bangko Sentral ng Pilipinas’ (BSP) 2-4% target and a hawkish central bank could support the peso, the current account deficit would continue to drag it down, MUFG said in its report.

“Nonetheless, the read-through to the PHP is mixed,” it said. “While strong growth could boost equity inflows and keep the BSP hawkish for longer, what also matters for PHP is the trajectory of the current account deficit.”

The BSP expects a $9.5-billion current account deficit, equivalent to 2% of gross domestic product this year.

It expects the deficit to have narrowed to $11.2 billion (2.5% of GDP) last year from $18.1 billion (4.5% of GDP) in 2022. The current account deficit stood at $10.9 billion — equivalent to 3.5% of GDP — in the nine months to September.

Inflation slowed to 2.8% in January from 3.9% in November and 8.7% a year ago, the slowest since 2.3% in October 2020.

BSP raised borrowing costs by 450 bps from May 2022 to October 2023, bringing the policy rate to a 16-year high of 6.5%.

MUFG Global Markets Research expects the BSP to begin its easing cycle in the second half as inflation moves to the upper half of the 2-4% target. “We continue to expect the PHP to underperform other Asian FX in 2024, but only modestly,” it added.

Michael L. Ricafort, chief economist at Rizal Commercial Banking Corp., said easing inflation had also supported the peso.

The trader expects the peso to weaken on Thursday “ahead of a potentially gloomy Chinese inflation report that might reignite concerns about the global economy.”

The trader sees the peso moving between P55.85 and P56.10 a dollar, while Mr. Ricafort expects it to trade at P55.90 to P56.10.

The peso has weakened by 1.04% or 58 centavos to date from its P55.37 close on Dec. 29. – Aaron Michael C. Sy, Reporter