Peso may strengthen on dovish central bank bets

The peso may continue to rise against the dollar this week on expectations that the US Federal Reserve may cut rates early next year amid slowing inflation.

The local currency closed at a fresh three-month high of PHP 54.40 versus the dollar on Friday, strengthening by 11 centavos from Thursday’s PHP 54.51 finish, data from the Bankers Association of the Philippines’ website showed.

This was the peso’s strongest close since its PHP 54.40-a-dollar finish on April 5.

Week on week, the peso jumped by PHP 1.22 from its PHP 55.62 close on July 7.

The local unit opened Friday’s session at PHP 54.45 per dollar. Its weakest showing was at PHP 54.55, while its intraday best was at PHP 54.31 against the greenback.

Dollars traded went down to USD 1.15 billion on Friday from the USD 1.41 billion recorded on Thursday.

The peso appreciated on Friday on expectations that the Fed may begin cutting rates in early 2024 after softer-than-expected producer price index (PPI) in June, Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort said in a Viber message.

The producer price index for final demand nudged up 0.1% last month, the Labor department said on Thursday, Reuters reported.

Data for May was revised to show the PPI falling 0.4% instead of the previously reported 0.3%. In the 12 months through June, the PPI gained 0.1%. That was the smallest year-on-year rise since August 2020 and followed a 0.9% rise in May.

Economists polled by Reuters had forecast the PPI would rebound 0.2% on the month and rise 0.4% on a year-on-year basis.

The US central bank paused its tightening cycle in June after hiking the fed funds rate by 500 basis points (bps) to 5%-5.25%.

The Fed will hold its next policy meeting on July 25-26.

Mr. Ricafort added that the peso was supported by a weaker US dollar recently.

The US dollar bounced on Friday after falling sharply the last few days, as investors consolidated losses ahead of the weekend, but its trajectory remained tilted to the downside with the Federal Reserve thought near the end of its rate hike cycle amid softening inflation.

The dollar index edged up 0.2% to 99.923, after touching a 15-month low of 99.574 earlier. The index was down 2.3% for the week.

The weekly decline was exacerbated by June US producer and consumer inflation data that showed easing price pressures.

Investors have been betting on a turn lower in the dollar for months, with short positions more than doubling over the month to July 7, according to data from Commodity Futures Trading Commission, although they remain far off the levels in 2021.

For the week, Mr. Ricafort said that the peso could continue to strengthen amid expectations of a dovish Fed, a stance that could be mirrored by the Bangko Sentral ng Pilipinas (BSP).

The BSP has kept borrowing costs steady for two straight meetings after hiking by a cumulative 425 bps to bring its key rate to a near 16-year high of 6.25%.

Its next policy meeting is on August 17.

For this week, Mr. Ricafort expects the peso to trade between PHP 54.20 and PHP 54.70 per dollar. — AMCS with Reuters