With the latest developments in the markets and the direction of monetary policy in the US, we believe that the peso will appreciate this year and a bit more in the next.
We have revised our forecast downward to PHP 55.1 to the dollar for 2023, and PHP 54.4 for 2024.
US Fed action
The US Federal Reserve, in its latest Federal Open Market Committee (FOMC) meeting, has again hiked its benchmark interest rates, albeit by a smaller increment of 25 basis points (bps), raising the target range for the federal funds rate from 4.25%-4.5% to 4.5% – 4.75%.
US inflation has been on a downward trajectory since July 2022, but the FOMC reiterated in its statement that despite signs of easing, inflation remains elevated and that it will take the appropriate policy measures to achieve its 2% inflation target.
US Fed Chair Jerome Powell added that while long-term inflation expectations appear optimistic, they do not offer room for complacency, and thus signaled that a restrictive policy will remain for some time.
Market response
Even prior to the FOMC meeting, the markets had already been pricing in less aggressive moves, despite the Fed’s firm hawkish stance and continuous signals of rate hikes and high rates.
Thus, the peso has been strengthening, trading in the PHP 54-PHP 55 levels as of end-January, and even recording a low of PHP 53.86 as the day progressed after the FOMC meeting. This is not unique to the peso, as some other currencies have likewise strengthened vs. the dollar.
Evidently, the rate hike and rate hike signals no longer bother the markets, and we now see a continuing weak dollar story.
Moreover, a Bloomberg article noted that there appears to be a contradiction between the Fed’s stern message that the battle vs inflation is not yet won and its apparent indifference to the January rally in markets. Thus, while the Fed continues to signal monetary tightening, the markets seem to think otherwise.
The story may still change over time, especially when China fully comes back into the picture. But for now, the markets are unconvinced by Fed signals.
