Peso strengthens as soft PMI data pull down dollar

The peso strengthened against the dollar on Monday following softer-than-expected US manufacturing purchasing managers’ index (PMI) data.

The local unit closed at PHP 55.97 per dollar on Monday, strengthening by 4.5 centavos from its PHP 56.015 finish on Friday, Bankers Association of the Philippines data showed.

The peso opened Monday’s session stronger at PHP 56 against the dollar. It moved within a narrow range, as its weakest showing was at PHP 56.055, while its intraday best was at its close of PHP 55.97 versus the greenback.

Dollars exchanged dropped to USD 768.2 million on Monday from USD 1.43 billion on Friday.

The peso was supported by a generally weaker dollar on Monday as softer US manufacturing data stoked expectations of a rate cut by the US Federal Reserve, Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort said in a Viber message.

“The peso continued to strengthen after the softer-than-expected US manufacturing PMI signaled concerns on the US economy,” a trader likewise said in an e-mail.

The US dollar drifted within a tight range on Monday, pressured by lower Treasury yields, as traders waited for more crucial economic data for fresh clues on the timing of Federal Reserve interest rate cuts, Reuters reported.

The dollar index — which measures the currency against six major peers, including the euro and yen — was little changed at 103.85 as of 0530 GMT, oscillating narrowly in the bottom half of it 103.43-104.97 range of the past month.

The index lost 0.26% on Friday following some weak manufacturing and construction spending data.

The Institute for Supply Management said its manufacturing PMI fell to 47.8 last month from 49.1 in January, the 16^th straight month that the PMI remained below 50. This indicates contraction in manufacturing.

For Tuesday, the trader said the peso could weaken anew due to a potential uptick in Philippine headline inflation last month.

The trader sees the peso moving between PHP 55.95 and PHP 56.10 per dollar on Tuesday, while Mr. Ricafort expects it to range from PHP 55.87 to PHP 56.07.

PESO TO UNDERPERFORM ASIAN FX
Meanwhile, MUFG Global Markets Research expects the peso to remain weak this year due to the country’s wide current account deficit, it said on Monday.

“While strong growth could boost equity inflows and keep the BSP (Bangko Sentral ng Pilipinas) hawkish for longer, what also matters for peso is the trajectory of the current account deficit,” the research firm said in a report.

“The current account deficit remains wide at around 3% of GDP, and FX (foreign exchange) valuations are expensive. The good news is that inflation is coming off, allowing policy space for BSP to cut rates gradually, while FDI (foreign direct investment) approvals have improved,” MUFG Global Markets Research said.

MUFG Global Markets Research expects the peso to end at P56.20 per dollar in the first quarter, P55.80 in the second quarter, P55.30 in the third quarter, and to close the year at P55 against the greenback.

“We continue to expect the peso to underperform Asian FX in 2024, but it’s important to stress this is not a massive bearish call,” it said.

The BSP projects a USD 9.5-billion current account deficit for 2024, equivalent to 2% of gross domestic product (GDP) last year. This would be narrower than the USD 11.2-billion (-2.5% of GDP) shortfall last year.

The BSP reported a current account deficit of USD 10.9 billion in the first nine months of 2023, equivalent to 3.5% of GDP.

The research firm also expects the BSP to cut rates by 50 basis points (bps) in the second half. The Monetary Board raised borrowing costs by 450 bps from May 2022 to October 2023, bringing the policy rate to a near 17-year high of 6.5%. It has since kept borrowing costs steady. — AMCS with Reuters