Why buy the dollar on dips
A broader economic reopening, more aggressive US Fed tightening, higher commodity prices, and other factors all point to a stronger US dollar up ahead.
On May 26 last year, the peso was at around PHP 48.15 to the dollar. Owing to a host of factors, it has since weakened over 8% year-on-year, closing at 52.40 yesterday against the greenback.
For those of you who have funds for investing in foreign exchange, or those with dollar requirements for your businesses, this presents a good opportunity to maximize investments. Our advice is to buy dollars on dips, meaning you buy when the dollar dips in price because, we believe, this is only temporary and it is likely to increase in value soon.
We see three fundamental drivers that will push the dollar higher in the medium term: 1) a more aggressive tightening from the US Federal Reserve, 2) a wider current account deficit in the Philippines, and 3) continued ramping up of infrastructure spending. Metrobank Research forecasts the dollar to reach PHP 53.40 in 2022 and PHP 54.70 in 2023.
Let’s take a closer look at these catalysts affecting the value of the dollar.
More aggressive tightening from the Fed
With US inflation reaching 40-year highs, increasing payrolls, and the unemployment rate almost back to pre-pandemic levels, markets now expect a total of eleven 25-basis-point (bp) hikes by the US central bank for the whole of 2022—an increase from last month’s nine 25-basis-point hikes priced-in.
With the prospect of an accelerated tightening of monetary policy in the US and, in turn, a faster rise in interest rates, the US dollar has also seen a broad-based strengthening against major currencies as it touched 20-year highs earlier this month.
As the Fed is poised to front-load rate hikes and reduce the balance sheet this year to re-anchor long-term inflation expectations, this has raised the risk of a stagflation, or even a recession, i.e., a “hard landing”.
Aside from concerns over a protracted economic slowdown in the US, a myriad of global risks stemming from the Russia-Ukraine war and COVID lockdowns in China have led investors to seek safe-haven assets such as the dollar. As these issues are expected to linger in the near-term and as more investors veer away from risk, we expect the dollar to stay supported.
Locally, the Philippine economy has turned a corner, successfully beating growth expectations for the past four quarters. Gross Domestic Product (GDP) for the first quarter of 2022 came in at 8.3% year-on-year, versus the consensus forecast of 6.8%. It was this growth that led to an earlier rate hike by the Bangko Sentral ng Pilipinas (BSP), a departure from its previous guidance of a possible rate hike in June.
As widely expected, the BSP delivered a 25-basis-point increase in the overnight lending rate to 2% on May 19. After the policy rate decision, the USD/PHP continues to trade within recent ranges, with quick dips closer to 52.10 remaining supported by dollar demand from companies.
However, players still appear to be wary of holding on to bullish peso positions as buying interest will fade as the dollar moves closer to 52.50. Real rates in the Philippines, or the key interest rate minus inflation, are still in negative territory. This is likely to weigh on the peso for most of the year.
Wider current account deficit
Import growth continues to outpace export growth due to the elevated prices of global commodities. As a result, importers are faced with higher dollar bills for the same volume of goods. As a net importing country, the Philippines is generally a price-taker. High commodity prices, especially those of oil and energy, do not bode well for the peso.
We expect that a broader global reopening in the coming years will lead to a widening of the country’s trade deficit, which, in turn, is supportive of USD/PHP strength. The BSP has also revised its forecast for the country’s current account, which it now sees reaching a deficit of USD 16.3 billion this year, or 3.8% of GDP, from its previous expectation of USD 9.9 billion, equivalent to 2.3% of GDP. For 2023, the BSP sees only a slight narrowing of this current account deficit to 3.7% of GDP.
Continued infrastructure spending
Another fundamental driver that not only supports a big pick-up in imports, but also points to a more sustainable revival of demand in a rebounding economy, is investment growth. The latest GDP print showed a promising surge in investments, which jumped by 20%. Meanwhile, infrastructure spending for the first quarter of 2022 also rose 4% despite the ban on public works before the May 9 elections.
This is part of the government’s “Build, Build, Build” program, which has led to an increase in the importation of capital goods. The outgoing administration has been in catch-up mode with its ambitious pipeline of big-ticket projects, for which construction has been derailed by the pandemic. Incoming President Bongbong Marcos Jr., however, has expressed his intent to build on the successes of the infrastructure program.
There remains a bigger chunk of the flagship projects yet to be completed in 2022 and beyond, and a sustained economic reopening is set to facilitate this headwind. That said, “Build, Build, Build” is one strong factor that supports our bullish view for USD/PHP through the next couple of years, as the importation of capital goods and raw materials and, in turn, dollar demand, would have to ramp up.
Why buy now
Looking ahead, we are likely to see the USD/PHP spot rate to continue trading within the 52.30 to 52.50 range in the coming days, so long as risk sentiment remains stable. To the downside, 52.30 should serve as strong technical support ahead of the 52.20 level.
On the other hand, selling interest ahead of 52.45 to 52.50 is expected to persist amid relatively light real demand, and the continued presence of local supply at 52.50.
At current levels, those with dollar requirements may find it strategic to buy closer to 52.30 or to hedge importations in view of further peso depreciation from here.
PATTY MEMBREBE is a Financial Markets Analyst at Metrobank – Institutional Investors Coverage Division, under the Market Strategy and Advisory Section. She communicates strategies on fixed income, rates, and portfolio solutions for our high-net-worth individual and institutional clients. She holds an AB Economics degree from Ateneo de Manila University and is currently pursuing graduate studies. On her free time, she enjoys watching indie films and watching gigs to support local indie music.