Peso extends climb amid growing dovish Fed bets

The peso climbed to a new four-month high against the dollar on Wednesday amid growing expectations of a September rate cut by the US Federal Reserve.

The local unit closed at PHP 56.50 per dollar on Wednesday, strengthening by five centavos from its PHP 56.55 finish on Tuesday, Bankers Association of the Philippines data showed.

This was the peso’s strongest finish in more than four months or since its PHP 56.491 per dollar close on April 8.

The peso opened Wednesday’s session sharply stronger at PHP 56.40 against the dollar. Its weakest showing was at PHP 56.54, while its intraday best was at PHP 56.345 versus the greenback.

Dollars exchanged inched up to USD 1.59 billion on Wednesday from USD 1.55 billion on Tuesday.

“The dollar-peso opened [stronger] amid heightened dovish Fed bets, but buying interest ensued later in the session,” a trader said by phone.

The peso was supported by a broadly weaker dollar amid expectations that US labor data to be released overnight would bolster wagers on a September cut by the Fed, Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort said in a Viber message.

The dollar slipped to its lowest this year versus the euro on Wednesday as traders braced for potentially crucial revisions to US payrolls data later in the day, ahead of a speech by Federal Reserve Chair Jerome H. Powell at the end of the week, Reuters reported.

The US currency also dipped below the closely watched 145 yen level and hovered close to the more-than-one-year low to sterling reached overnight.

Pressure notably came from US bond yields, which hit their lowest since Aug. 5, when yields crashed to a more-than-one-year trough after surprisingly soft monthly jobs figures sparked recession fear.

A weak monthly payrolls report at the start of this month was a catalyst for a spike in volatility across asset classes, leaving market participants bracing for another potential shock with revised data due later Wednesday.

The Aug. 2 payrolls report sent traders racing to price in prospects of the Fed needing to slash interest rates by a half percentage point at its mid-September policy meeting, pushing the implied probability of such a move to about 71%, according to CME Group’s FedWatch Tool.

However, a run of better macroeconomic data has since seen the odds flip, with bets now 72% for a quarter-point cut and 28% for the bigger reduction.

Mr. Powell’s keynote address on Friday at the Kansas City Fed’s Jackson Hole economic symposium will be parsed carefully for any hints on the likely size of a rate cut next month, and whether borrowing costs are likely to be lowered at each subsequent Fed meeting.

The US dollar index — which measures the currency against the euro, sterling, yen, and three other major rivals — edged to its lowest since Jan. 2 at 101.30 before recovering to 101.48 as of 0450 GMT. It had fallen 0.5% or more in each of the previous three sessions.

For Thursday, Mr. Ricafort sees the peso ranging from PHP 56.40 to PHP 56.70 per dollar.

Meanwhile, the trader said the peso is expected to continue consolidating as markets await the Fed’s September policy meeting. — AMCS with Reuters