Philippine peso strengthens

MANILA, Philippines, August 28 ------ The Philippine peso strengthened by 1.19 percent to 56.415 last week as the currency touched its strongest level in five months against the US dollar.

The peso’s rebound defied earlier expectations, which had predicted weakness on bets that the Bangko Sentral ng Pilipinas (BSP) would cut rates before the Federal Reserve. The peso’s strength was caused by US dollar weakness against most currencies. Lower US inflation and slower economic growth suggest that interest rates may start coming down. Additionally, the unwinding of carry trades and the broadening of stock market gains to other sectors and other countries have further contributed to the dollar weakness.

The BSP lowered its benchmark interest rate by 25 basis points to 6.25 percent at its August policy meeting, a move that had long been signaled by the central bank. Governor Remolona emphasized that the inflation outlook was skewed to the downside for 2024 and 2025, prompting the rate cut. This decision aligns with Remolona’s statements in recent months, which have been preparing markets for potential easing.

A key driver of the peso’s strength is the broad weakening of the US dollar against most currencies. Cooling US inflation, which has decelerated for four straight months, and lower US interest rates have diminished the dollar’s appeal. This has narrowed interest rate differentials against major currencies like the yen, and the euro triggered a significant rebalancing in the forex markets.

Market anticipation of the Fed’s first rate cut has triggered a significant unwinding of carry trades. One popular carry trade involves shorting the Japanese yen while buying US Treasuries and US stocks. This shift has led to notable appreciation in the Japanese yen, Swiss franc, British pound and the euro as well as other major currencies over the past two months. Asian currencies have also benefited from this broad weakening of the US dollar, with the Malaysian ringgit and Thai baht leading the gains. The Philippine peso has likewise strengthened, rallying 4.35 percent from its low earlier this year.

While the peso has strengthened alongside Asian peers, the Philippine Stock Exchange Index (PSEi) has surged by 13 percent from its June low. The PSEi closed at 6,961.96 last week – near the upper end of its two-year range. This reflects a broadening global bull market that is extending to diverse sectors and emerging markets like the Philippines. The broadening has resulted in flows coming into other sectors and countries, with the Philippine peso and stock market being clear beneficiaries.

Source: philstar.com