Peso may weaken further against the US dollar, but effects may be muted

By the end of the 2nd quarter or early 3rd quarter of 2024, a US dollar may be worth PHP 58 or higher.

Armand Barlis, Head of Metrobank’s Foreign Exchange Division, said import season is fast approaching and a host of factors, such the risk of delays in the US Federal Reserve’s decision to cut interest rates, will likely push the dollar temporarily higher, similar to the peak we saw in 2022.

Our yearend forecast of PHP 54 to the US dollar has recently been adjusted with an upward bias, but further recalibration is warranted to reflect current market conditions.

“I think a depreciation in the peso would probably have a muted effect for us in terms of growth,” said Barlis. “While a stronger dollar will lead to more costly imports, and, ultimately, higher inflation since we are largely an import-oriented economy, a weaker peso can also help the country since it has a lot of US dollar inflows from our overseas Filipino workers (OFWs) and the Business Process Outsourcing (BPO) sector, which should support the local economy.”

It is also possible that US outperformance could lose steam and eventually turn back the tide for the peso.

“The US economy has been showing some cracks at this point, and that could help support investment flows to return to economies that look resilient enough,” said Barlis. “We also expect the BSP to provide liquidity in the forex markets should the peso fall too fast,” he added.

For now, he thinks investors should keep in mind these factors that are supporting the stronger US dollar:

1. The expected delay in the US Fed’s rate cuts towards the last two quarters of the year.
2. Seasonality-driven demand as the need for dollars increases mid-year.
3. Weakness of other Asian currencies, such as the Japanese yen and Chinese yuan. Among Asian countries, the yen has depreciated the most this year at around 10%, while the peso is in the middle of the pack at around 4%.
4. Geopolitical factors that increase the demand for safe haven assets, such as the US dollar.
5. Higher commodity prices because of weather disturbances such as the El Niño, which continues to put pressure on the rice supply. The price of oil, which is one of the country’s biggest imports, also contributes to dollar demand.

ANTHONY O. ALCANTARA is the editor-in-chief of Wealth Insights. He has over 20 years of experience in corporate communications and has won various communication awards for his work in helping companies and individuals communicate with purpose, clarity, and creativity. He also has a master’s degree in technology management from the University of the Philippines. When not at work, he goes out on epic adventures with his family, practices Aikido, and sings in a church choir.