Central bank prepared to defend peso from hitting 58 per dollar
The Bangko Sentral ng Pilipinas (BSP) is expected to “forcefully” defend the peso from hitting the 58-per-dollar level, continuing its track record of soothing volatility to mitigate the pass-through effect of a weak currency on inflation.
In a commentary, Lenny Jin, global foreign exchange strategist at HSBC, explained that the BSP’s readiness to support the local unit is one of the reasons why “upside in spot rates is limited.”
“PHP underperformance, despite having one of the strongest growth stories and one of the highest rate levels in Asia, may be seen by the BSP as deviating from fundamentals, which typically triggers intervention,” Jin said.
The BSP can intervene in the foreign exchange market by selling some dollars from its reserves to ease any sharp depreciation of the peso.
In an interview with Bloomberg last week, Governor Eli Remolona Jr. said the BSP had “ample reserves” to prop up the peso in case it sharply depreciates against the US dollar, which has gained momentum amid capital outflows triggered by geopolitical risks and diverging US rate outlook.
With the peso trading in the 57 territory over the past weeks—the weakest in 18 months—Remolona said the BSP had been actively intervening in the foreign exchange market recently, but “in small amounts.”
‘Unequivocally dovish’
This, as Remolona also expects the BSP to cut interest rates in August or ahead of the US Federal Reserve, which he forecasts to start easing in September. The central bank chief said he’s not worried about such a move’s impact on the peso, which may come under pressure if local yields become less attractive to capital inflows while rates are still high elsewhere.
For Jin, the BSP’s history of forceful foreign exchange interventions would deter any attempt to “challenge” the central bank.
He also does not expect the BSP to ease ahead of the Fed despite the Monetary Board sounding “unequivocally dovish” at its policy meeting last week, contrary to Remolona’s rate outlook.
“The BSP maintains one of the best track records of defending the currency resolutely and has ample reserves at its disposal,” Jin said. “We think markets will have limited appetite to challenge the central bank once they sense a forceful defense.”
