Peso sinks as Bank of Japan exits negative-rate regime

The peso sank against the dollar on Tuesday following the Bank of Japan’s (BoJ) move to exit its negative interest rate policy regime.

The local unit closed at PHP 55.92 per dollar on Tuesday, weakening by 34 centavos from its PHP 55.58 finish on Monday, Bankers Association of the Philippines data showed.

The peso opened Tuesday’s session weaker at PHP 55.68 against the dollar. Its worst showing was at PHP 55.95, while its intraday best was at PHP 55.67 versus the greenback.

Dollars exchanged went up to USD 1.31 billion on Tuesday from $1.01 billion on Monday.

“The peso continued to weaken after the first policy rate hike from the Bank of Japan,” a trader said in an e-mail.

The Bank of Japan ended eight years of negative interest rates and other remnants of its unorthodox policy on Tuesday, making a historic shift away from a focus of reflating growth with decades of massive monetary stimulus, Reuters reported.

The shift makes Japan the last central bank to exit negative rates and ends an era in which policy makers around the world sought to prop up growth through cheap money and unconventional monetary tools.

In a widely expected decision, the BoJ ditched a policy put in place since 2016 that applied a 0.1% charge on some excess reserves financial institutions parked with the central bank.

The BoJ set the overnight call rate as its new policy rate and decided to guide it in a range of 0-0.1% partly by paying 0.1% interest on deposits at the central bank.

The central bank also abandoned yield curve control, a policy that had been in place since 2016 that capped long-term interest rates around zero.

The peso slumped against the dollar on Tuesday ahead of the Fed’s meeting, Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort added in a Viber message.

The US central bank will hold a policy meeting on March 19-20. The Fed raised its target rate by 525 basis points from March 2022 to July 2023 to the 5.25-5.5% range.

For Wednesday, the trader said the peso could drop further amid hawkish Fed bets.

The trader sees the peso moving between PHP 55.80 and PHP 56.05 per dollar on Wednesday, while Mr. Ricafort expects it to trade from PHP 55.90 to PHP 56. — AMCS with Reuters