September 22 ------ The rapid peso depreciation breached the P58 vis-à-vis the US dollar level, with markets bracing for higher US Federal Reserve rates and the local central bank’s expected 50 basis points (bps) rate hike tomorrow.
The local currency fell to its new intraday low of P58 which was also its closing rate, after a weak opening of P57.7 versus its close of P57.48. The weighted average was at P57.89 from P57.42 previously, based on Bankers Association of the Philippines data. The spot market volume increased to $1.05 billion from $967 million. Metropolitan Bank and Trust Co. (Metrobank) Treasurer and Head of Financial Markets Sector, Fernand Antonio Tansingco told reporters that the exchange rate going forward will depend on when local currency rate will be “in sync” with the US Fed. The peso rate differential versus the expected US dollar rate is too wide at the moment. “By tonight they (US Fed) will probably raise by 75 bps (basis points). For the BSP (Bangko Sentral ng Pilipinas), we think 50 bps but hopefully we can increase it at a faster pace. Only then that the pace of the peso depreciation might even slow down,” said Tansingco.
Exchange rate pressures have worsened since higher rates are favoring the greenback. Since end-2021’s closing of P50.99, the peso has lost P7 or has devalued by 13.74 percent. Spot market volatilities come from the market’s expectation that the BSP will further tighten the benchmark rate in the last three Monetary Board policy meetings for this year. Depreciation pressures also come from the hawkish US Fed which is favoring a strong US dollar. Tansingco said that hopefully, since the US Fed’s expected terminal rate or end-2022 policy rate is four percent, the BSP should close the year at five percent from its current 3.75 percent benchmark rate. “I think we’re looking more at the terminal rate rather than the pace of increase. We will probably stop increasing once we hit the terminal rate. If the Fed’s terminal rate is 4 percent, we need to go to around 5 percent maybe next year. The Fed’s terminal rate is expected to be 4 percent by next year. If the Fed is to hit that level, it means another two hikes,” he said.
Tansingco said if the BSP intends to raise the interest rate by five percent within the first half of 2023 – as forward guidance — it will help stabilize the exchange rate now. “As soon as we hit a healthy differential between the peso and the US dollar then I think that will stabilize the peso. We would have to be data dependent,” he said. One good thing is that while the US yield curve is inverted, the Philippines’ still on the positive side, he added. When asked if he thinks the peso could still depreciate further to P60 this year, Tansingco said that could be avoided. “P60:$1 can be avoided, it can be reversed if we can get back the appropriate interest rate differentials,” he said. This is about three percent interest rate differential but two percent “might be enough” to “at least to stave off depreciation.” “Narrow interest rate differential is not only on the exchange rate but also on inflationary effect that feeds into the cost of goods so while our central bank is inflation targeting, they are not really looking at the exchange rate. It might be challenged until we can contain the depreciation of the peso,” said Tansingco.
Meanwhile, the Metrobank official said a lot of corporates are hedging their dollar position. It is only those that were unprepared for the US dollar depreciation that are getting a lot of stress. “A lot of corporates are hedging. What we’ve seen also is that the big conglomerates have been very circumspect about exposing. (Fortunately) we don’t see too much dollar loans,” said Tansingco. Generally, he also commented that the data-dependent BSP is “doing the right thing”. The BSP has so far raised the RRP rate by 175 bps since May 19. “The BSP is doing the right thing, they are data driven and able to change their policies in response to data which we saw when they did the surprise 75 bps (rate hike in July),” he said. “That for me, proves the BSP’s pro-activeness and willingness to adjust the policy rate very quickly,” Tansingco added.
While the exchange rate is market-determined, the BSP has the ammunition to intervene and to participate via other monetary measures to prevent major exchange rate volatility. The central bank currently implements a Currency Rate Protection Program (CRPP) which the BSP reactivated in 2018 when the peso was depreciating due to inflation worries. The CRPP facility is a non-deliverable US dollar-peso forward contract between the BSP and big banks to “help relieve the pressure on the foreign exchange market created by corporate clients wanting to front load their future foreign currency requirements.”
The country’s exchange rate policy supports a freely floating exchange rate system where the BSP leaves it to market forces to dictate the exchange rate level. The BSP will only enter the spot market to ensure “order and temper destabilizing swings” in the peso-US dollar rate. If needed, the BSP will release dollar liquidity and it will ensure there are legitimate demands for foreign currency and that these are provided for. As such, “smoothening out the exchange rate volatility is critical in performing our primary mandate of price stability since fluctuations in the exchange rate tend to feed directly into domestic prices of imported goods and services, and indirectly, through the prices of goods and services that use imported inputs,” said the BSP.
The BSP has never tolerated speculative behaviors and stands ready to use its reserves to protect the local currency against massive selling of traders wanting to cash-in on a depreciating peso. The BSP mantra is that the peso will “take care of itself”. Speculative attacks on currencies occur when there is excessive, large volume of foreign exchange selling in the hope that the central bank will run out of reserves and thus a currency crisis ensue, and speculators with a foreign currency hoard will be able to dictate market price.