Currencies 5 MIN READ

April forex recap: Mixed reactions on USD amid crises

The US dollar’s value remains to be in a roller coaster state after being battered by the collapse of several US banks, plus a debt ceiling crisis. Still, there are silver linings that highlight the demand for US dollar-denominated instruments, particularly US treasury bonds, as safe havens.

May 29, 2023By EA Aguirre

April 2023 was a generally weak month for the US dollar as it continued to be battered by a regional banking crisis that started in March with the collapse of Silicon Valley Bank (SVB). The tightening in bank credit conditions that followed had markets wondering whether the crisis was already doing the Federal Reserve’s job for it and if additional rate hikes were still necessary.

These sentiments grew stronger after the March 2023 Consumer Price Index (CPI) came out lower at 5% year-on-year versus 5.2% forecast. By mid-April, better than expected Q1 2023 earnings of the top US banks helped alleviate banking crisis fears and prop up the US dollar.

The currency continued to recover on still-high one-year US inflation expectations of 4.6% versus 3.7% forecast and was barely affected by news of First Republic Bank’s deposit outflows and stock sell off, which eventually led to its closure on May 1.

The Japanese yen (JPY) was the biggest loser in April, starting at 132.46, and then ending higher at 136.30 as the Bank of Japan (BOJ) made no changes to monetary policy at its April meeting. Markets saw the move as a dovish tilt from previous expectations of immediate hawkish changes when Governor Kazuo Ueda’s nomination was announced.

However, it seems that the BOJ is quietly laying the groundwork for a potential future policy shift. A review of past changes in monetary policy was announced at the meeting.

There were also some notable changes in rhetoric such as the removal of the central bank’s previous pledge to keep interest rates at “current or lower levels.”

Despite Q1 2023 Gross Domestic Product (GDP) underperforming at 1.3% versus 1.4% forecast, the Euro fared much better than its G3 counterparts on a combination of improved growth expectations, steadily easing inflation and consistently hawkish European Central Bank (ECB) rhetoric which it still open to rate hikes in 50-basis point (bp) increments.

But the ECB may be in a similar position to the Fed as markets have priced in only 1-2 further hikes in the next two meetings. We also wonder whether the EUR/USD exchange rate already reached its target upside at 1.1100 as overly bullish Euro positions started to take profit at those levels.

Pound sterling (GBP) remained the best performer last month as United Kingdom inflation in March remained in double digit territory at 10.1% versus 9.8% forecast, which highlighted the extended need for the Bank of England (BOE) to keep policy rates elevated.

Wage growth also remained strong as quarterly total average weekly earnings surprised to the upside at 5.9% versus 5.1% forecast. The desk continues to be slightly bullish on GBP/USD exchange rate as the BOE has to remain more hawkish to stamp out inflation while also trying to avoid a technical recession.

Despite initial expectations that an OPEC+ supply cut would cause oil prices to shoot up, prices remained stable in April, which caused the Canadian dollar (CAD) to weaken by as little as 0.18%. The currency pair seems to have established a near term bottom at the 1.3350/1.3400 region, similar to how oil has tapered off its decline at the USD 66-67 per barrel level. Given that the Bank of Canada (BOC) also paused its rate hikes earlier than the Fed, we still see opportunities for the US dollar to strengthen against its Canadian counterpart.

The Australian dollar and New Zealand dollar tracked lower metals prices as both seemed to track the move of copper futures in particular. Pessimistic views on China’s economy and decreasing demand for imported metals further reinforces the bearish views on Australian dollar (AUD) and New Zealand dollar (NZD). AUD was initially pressured by the Reserve Bank of Australia’s (RBA) decision to pause its policy rates at 3.6% but the currency pair was able to recover some losses as Australian Employment Change doubled expectations at 53,000 versus 20,000 forecast.

AUD ended lower by 0.91%. On the other hand, NZD weakened further by 1.34% as Q1 2023 CPI came out much lower at 6.7% year-on-year versus 7.1% forecast. Previously, New Zealand inflation had been stuck at 7.2% for both Q3 and Q4 2022.

Growing weakness in CNH

It has been months since China ended restrictive lockdowns and global markets have yet to see any spikes in significant demand, particularly the aforementioned metals that the country used to import from Australia and New Zealand. The offshore yuan (CNH) did not strengthen at all despite positive data in Q1 2023 GDP (4.5% versus 4% forecast), year-on-year March trade balance (USD 88.19 billion versus USD 39.20 billion forecast), year-to-date industrial production (3% versus 2.7% forecast), and unemployment (5.3% versus 5.5% forecast), as investors expected pre-pandemic-level figures.

To make matters worse, the People’s Bank of China (PBOC) signaled the possibility of rate cuts later in the year in order to further spur growth. This will continue to put pressure against the CNH, which will likely stay above the 7.0000 level.

The above forecasts are the foreign exchange traders’ personal opinions and may not reflect the official views of the bank.

The US dollar continues to be strong against its global peers even after First Republic Bank replaced SVB as the second largest bank closure in US history. Ironically, the risk off sentiment brought about by both the regional banking crisis and debt ceiling only further increased the demand for US treasury bonds as a safe haven investment.

Slight decreases in recent inflation figures also support expectations of high policy rates. The Fed is currently divided on whether to pause or hike rates once more in June but it will probably take signals of future rate cuts to cause the US dollar to weaken significantly.

EARL ANDREW “EA” AGUIRRE  is a Market Strategist at Metrobank’s Financial Markets Sector and has 10 years of experience in foreign exchange, fixed income securities, and derivatives sales. He has a Master’s in Business Administration from the Ateneo Graduate School of Business. His interests include regularly traveling to Japan and learning its language and culture.

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Currencies 5 MIN READ

March 2023 global currencies recap: Complete reversal

The US dollar has weakened against other currencies in March. Will it recover soon?

April 28, 2023By EA Aguirre

March 2023 initially had the US Dollar on a strong start as Federal Reserve Chair Jerome Powell testified before US Congress that inflation figures were still too strong and that policy interest rates had to move higher for longer.

However, this was followed by the closure of Silicon Valley Bank (SVB) and Signature Bank while First Republic teetered on the edge. The banking crisis that started in the US made its way to Switzerland as investors were once again skeptical of Credit Suisse, which had already been struggling over the last two years.

Markets abandoned the US dollar for other safe haven assets such as US treasury bonds, gold, and the Japanese Yen. Even when the US Federal Reserve and Swiss National Bank stepped in to restore confidence in the banking system, a slew of weaker-than-expected US economic data in Producers Price Index (-0.1% vs. 0.3% est.), Retail Sales (-0.4% vs. -0.3% est.), and 4Q 2022 Gross Domestic Product (GDP) (2.6% vs. 2.7% est.) continued to push the dollar to its lowest level year-to-date.

MoM change of currency pairs USDJPY2

The Japanese yen (JPY) appreciated all the way to 132.86. However, demand for JPY as a safe haven currency has dwindled as markets have started to move past the banking crisis, especially after the top US banks released better-than-expected earnings for the 1st quarter of 2023.

Markets had also expected the new Bank of Japan (BOJ) Governor Kazuo Ueda to initiate discussions on reducing Japan’s ultra-loose monetary policy, but he has instead lowered these expectations in the near term, preferring not to make any sudden changes to policy.


Both the euro (EUR) and British pound (GBP) rallied following SVB’s collapse and were relatively insulated from the Credit Suisse issue after Swiss regulators stepped in and arranged the bank’s sale to its rival UBS.

The European Central Bank (ECB) met market expectations by hiking its three policy rates by 50 basis points (bps). ECB President Christine Lagarde continued to point towards stubbornly high inflation as the main focus, with Germany’s Consumer Price Index (CPI) for February remaining the same as January at 8.7% year-on-year.

The pound sterling was the clear winner last month as the United Kingdom’s (UK) February CPI rebounded to 10.4% vs. 9.9% estimate and 4th quarter 2022 GDP grew by 0.6% vs. 0.4% estimate. The Bank of England (BOE) hiked its policy interest rates by only 25 bps to 4.25%, but with UK inflation still in double-digit territory relative to its peers, the central bank still has some ways to go to bring down inflation.

EUR/USD and GBP/USD closed the month at 1.0839 and 1.2337, respectively.


The Canadian dollar had a rough start as it tracked weaker oil prices and was weighed down by a dovish Bank of Canada (BOC). The BOC decided to pause its hiking cycle for the first time in nine months.

Its policy interest rate stands at 4.5% as its governing council believes that current borrowing costs are restrictive enough to bring inflation down to the 2% level. Canada’s February CPI printed lower at 5.2% vs. 5.4% estimate.

USD/CAD went lower after a bounce in oil prices and the currency pair closed the month at 1.3516. With OPEC+ cutting its supply of oil, this should help the Canadian dollar continue to outperform.

The Australian dollar and New Zealand dollar took opposite paths in March, following the divergent tones of their respective central banks. The Reserve Bank of Australia (RBA) kept its policy rate steady at 3.6% in order to monitor the effect of higher rates on the economy.

AUD/USD closed slightly lower at 0.6685, aided by stronger Employment Change (64.6k vs. 48.5k estimate) and Retail Sales (0.2% vs. 0.1%). On the other hand, the Reserve Bank of New Zealand (RBNZ) hiked its policy rate by 50 bps to 5.25% when markets were expecting only 25 bps. NZD/USD made its way higher to 0.6258. However, the view for both of these currencies is slightly bearish as global investors slowly return to the US dollar.

The Offshore Chinese yuan became a pseudo-safe haven currency as solid economic data helped it stand out in a month when markets could not turn to the US and Switzerland.

China outperformed in its manufacturing and non-manufacturing Purchasing Managers’ Index (PMI) figures, bringing the currency pair down to 6.8703 from highs of 7.0000. This also helped indirectly lift other emerging market currencies in Asia.

FX Traders’ Forecasts


The above forecasts are the foreign exchange traders’ personal opinions and may not reflect the official views of the bank.

The month of March saw a complete reversal in the US dollar after weaknesses were found in the country’s financial system. But after the initial panic, prudent investors were quick to realize that these weaknesses were also brought about by the regional banks themselves.

SVB was an isolated case as the bank’s client base was too concentrated on technology startups. The bank was also a victim of high interest rates after it had to sell some of its bond holdings at a loss in order to fund withdrawals.

Eventually, the US government stepped in to protect depositors, introduce new liquidity tools, and restore confidence in the banking system. Withdrawals from regional banks went to the large banks, which produced better-than-expected earnings for the 1st quarter of 2023. The US dollar may have lost in March but it is starting to climb its way back up.

EARL ANDREW “EA” AGUIRRE  is a Market Strategist at Metrobank’s Financial Markets Sector and has 10 years of experience in foreign exchange, fixed income securities, and derivatives sales. He has a Master’s in Business Administration from the Ateneo Graduate School of Business. His interests include regularly traveling to Japan and learning its language and culture.

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Currencies 5 MIN READ

The US dollar isn’t out just yet

There’s still greater demand for US dollars and USD-denominated assets but could the recent US banking issues hold bank the greenback’s strength?

March 22, 2023By EA Aguirre

Markets underestimated Fed hawkishness as the risk rally that started in January saw a complete reversal in February.

It started when US non-farm payrolls for January exceeded expectations, adding 517,000 new jobs versus 189,000 forecast. The unemployment rate also fell to a 53-year low of 3.4% with two job openings for every unemployed individual, further highlighting the strong labor market.

US inflation indices also surprised everyone by coming out higher than expected. The consumer price index (CPI) grew by 6.4% year-on-year versus 6.2% forecast while the Fed’s preferred inflation gauge, the core personal consumption expenditure (PCE) increased 4.7% year-on-year versus 3.9% forecast. Other economic data releases in retail sales and purchasing managers index (PMI) showed robust business activity, despite elevated interest rates.

However, US dollar may see another challenge to its strength as the bank runs on Silicon Valley Bank (SVB) and other smaller financial institutions in March have investors thinking that the Fed may have tightened too much. European currencies such as the euro and pound sterling are also adversely affected by struggling Credit Suisse.

Month-on-month change of major currency pairs – Feb 2023

It did not help that Japan’s 4Q 2022 gross domestic product (GDP) grew at a much weaker 0.6% versus 2% forecast, as the return of tourists was not able to offset a slowdown in capital expenditure and exports. The Bank of Japan (BOJ) also maintained the status quo of loose monetary policy and incoming BOJ Governor Kazuo Ueda has not made any opposing comments, despite initial hawkish impressions. USD/JPY went from a low of 128.68 in the first couple of days to trending upward all the way back above the 136.17 by February 24.

But with the Japanese yen, traditionally a safe haven currency, Japan could still see flows coming in from troubled banks in the US and Europe.

European Central Bank (ECB) President Christine Lagarde reiterated that the central bank will likely hike by 50 basis points (bps) in March to a 3% deposit rate, even as Euro zone inflation slowed from 9.2% in December to 8.6% in January. However, the EUR/USD still fell from a high of 1.0990 on the first day of the month all the way down to 1.0548 as US dollar strength dominated. The euro’s only reprieve is that the European Union (EU) has been able to completely replace Russian oil imports with supply from US, Norway and Qatar, tempering domestic demand for US dollars.

The pound sterling was still able to put up a fight as United Kingdom (UK) 4Q 2022 GDP grew by 0.4% amidst recession fears. GBP/USD traded from a high of 1.2376 down to a low of 1.1944 on February 24, but bounced back to 1.2022 by the end of the month. January UK inflation also remained elevated at 10.1% which could necessitate further rate hikes by the Bank of England (BOE).

However, both currencies are at risk should issues surrounding Credit Suisse’s stability negatively affect confidence in the European banking system. Immediately after SVB’s closure, Credit Suisse and the Swiss National Bank quickly initiated talks to reassure the public that the bank will not fail.

Optimism on China’s reopening waned as the giant did not have its explosive start and impact on commodity markets as anticipated. West Texas Intermediate (WTI) Crude Oil decreased slightly, from an average price of USD 78.16/barrel in January to USD 76.86/barrel in February. Gold and copper prices also decreased by coming from a sustained rally in January.

Canada CPI continued its descent with the January figure slowing to 5.9% year-on-year, reaffirming the Bank of Canada’s (BOC) decision to pause its hiking cycle at 4.5%. USD/CAD started the month at 1.3291 and has climbed to 1.3647 by the end, driven by a hawkish Fed in contrast with a dovish BOC.

With 4Q 2022 inflation for both Australia and New Zealand well above 7%, the Reserve Bank of Australia (RBA) hiked 25 bps to 3.35% while the Reserve Bank of New Zealand (RBNZ) hiked an even greater 50 bps to 4.75%. AUD/USD fell from 0.7137 down to 0.6726 and NZD/USD fell from 0.6506 down to 0.6185. AUD underperformed the most also because of weakness in the Australian job market.

China was still in a slow start, especially since the nation was coming from its Lunar New Year holidays.

Relations between the US and China soured after a Chinese-operated balloon off the southeastern US coast was shot down after being suspected over spying on US military sites. China claimed the balloon was just a weather-monitoring device that accidentally drifted into US airspace.

The offshore yuan started the month at 6.7195 and ended it at 6.9810. With record low 4Q 2022 GDP growth of 2.9% and January inflation at 2.1%, the People’s Bank of China (PBOC) is in no hurry to be hawkish and might instead consider more growth-centered policy.

The above forecasts are the foreign exchange traders’ personal opinions and may not reflect the official views of the bank.

Our FX traders’ personal views have altered slightly to account for greater US dollar strength than originally anticipated. A strong labor market and sticky inflation will have markets continuously on the lookout for the Fed’s terminal rate. The higher and longer US rates are projected to be, the greater the demand for US dollars and USD-denominated assets. But with the issues surrounding SVB and US regional banks, it remains to be seen whether the USD can hold onto its strength or whether the Fed can remain hawkish for longer.

Earl Andrew “EA” Aguirre is a Market Strategist at Metrobank’s Financial Markets Sector and has 10 years of experience in foreign exchange, fixed income securities, and derivatives sales. He has a Master’s in Business Administration from the Ateneo Graduate School of Business. His interests include regularly traveling to Japan and learning its language and culture.

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Currencies 4 MIN READ

EUR/USD trade opportunities still abundant despite inflation

Despite ongoing issues with banks such as SVB in the US, the market’s attention will still look at the Fed’s hawkish rhetoric as a reaction to a hot labor market and elevated inflation. But our FX traders still expect the euro to return to its previous bullish trend in the medium term.

March 15, 2023By EA Aguirre

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The first few days of March 2023 saw surprises in Eurozone inflation figures. Both France and Spain saw unexpected increases in their February consumer price indices (CPI), printing at 7.2% and 6.1% year-on-year respectively.

This marks the third consecutive month of rising inflation for both nations as they continue to contend with higher food and services costs. German CPI also stayed sticky at 8.7% year-on-year vs. the same figure in January, despite cooling energy prices due to a warmer winter.

The consolidated inflation figure for the 20-nation bloc Eurozone remained elevated, printing at 8.5% year-on-year vs. 8.6% in January and beating 8.2% consensus forecast. Core CPI, which excludes volatile food and energy prices, even hit a new high of 5.6% vs. 5.3% the previous month, signaling that services inflation in the Eurozone has not yet peaked.

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Currencies 5 MIN READ

Global Currencies: Strong USD to remain in Q1 2023

The resilient US labor market and inflation will keep the US dollar strong against global peers. Challenges, however, abound for the rest of the year.

February 21, 2023By EA Aguirre

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The US dollar is expected to remain steady against other global currency peers, which can lead to more purchases of the US dollar for the first quarter of 2023.

But the overall direction for the year is for the US dollar to depreciate as global central banks continue to pursue their own paths to monetary policy normalization and as the US runs the risk of a possible recession.

Six consecutive months of declining US inflation and inconsistent statements from the Federal Reserve Chair Jerome Powell were enough to bring about a bearish US dollar story in January.

The Dollar Currency Index (DXY), which measures the strength of the dollar against a basket of major currency peers, fell by 1.36%, as markets started to price in an end to monetary policy tightening and possible interest rate cut by the 2nd half of 2023.

However, with a resilient US labor market and inflation just meeting expectations, our foreign exchange traders still expect high US rates and bouts of US dollar strength to persist.

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Currencies 2 MIN READ

Forecast updates: Dollar-peso exchange rate likely to be lower

The US Fed hiked rates by 25 basis points, inflation is on a downward trajectory, the markets have priced in less aggressive moves by the Fed. Where will we see the peso going now?

February 2, 2023By Metrobank Research

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With the latest developments in the markets and the direction of monetary policy in the US, we believe that the peso will appreciate this year and a bit more in the next.

We have revised our forecast downward to PHP 55.1 to the dollar for 2023, and PHP 54.4 for 2024.

US Fed action

The US Federal Reserve, in its latest Federal Open Market Committee (FOMC) meeting, has again hiked its benchmark interest rates, albeit by a smaller increment of 25 basis points (bps), raising the target range for the federal funds rate from 4.25%-4.5% to 4.5% – 4.75%.

US inflation has been on a downward trajectory since July 2022, but the FOMC reiterated in its statement that despite signs of easing, inflation remains elevated and that it will take the appropriate policy measures to achieve its 2% inflation target.

US Fed Chair Jerome Powell added that while long-term inflation expectations appear optimistic, they do not offer room for complacency, and thus signaled that a restrictive policy will remain for some time.

Market response

Even prior to the FOMC meeting, the markets ha

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Currencies 3 MIN READ

USD/PHP 2023 outlook: Don’t bet on a sustainably stronger peso

For those watching the movement of the dollar-peso exchange rate, the recent strengthening of the peso, while desirable for some, may be fleeting.

December 8, 2022By Patty Membrebe
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In the past week, the peso strengthened 1.12% versus the US dollar. Year-to-date, however, the local currency has weakened by as much as 13.6%.

The current dip in the dollar-peso exchange rate comes on the heels of a downward momentum in the broad US dollar index, as markets become more optimistic about the US Fed slowing the pace of rate hikes and a possible China reopening next year.

After trading at 20-year highs this year, the US dollar has come off its peak. Now, the question is: Will the US dollar continue to weaken in the coming months?

We cite three main reasons why we think the answer is no.

 1. Negative real rates and a still narrow interest rate differential (IRD).

Our base case for the US economy in 2023 is a “bumpy” soft landing, characterized by modestly positive GDP growth (0% to 1%, in line with 2022 levels) and moderating inflation. We estimate 2023 full-year US average headline inflation to slow to 4.3%, from an estimated average of 8.1% in 2022.

After four consecutive 75-bp hikes since June, we expect the US Fed to slow their tightening by 50 basis points (bps) to 4.5% (from 4% currently) in the n

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Currencies 3 MIN READ

Metrobank’s view: ‘Hold on to your dollars’

Will the peso depreciate even more before the year is out? Metrobank’s foreign exchange division head gives us some clarity.

September 12, 2022By Anthony O. Alcantara

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The peso’s recent slide is not a cause for alarm, at least for now, Armand Barlis, Head of Metrobank’s Foreign Exchange Division, said.

“Since the start of the year, the expectation has really been for a weaker peso,” he said.

“There are a lot of factors, such as the country’s growing fiscal and trade deficits, but the most important factor is the prospect of faster rate hikes in the US, which has led the US dollar to soar globally,” he added.

The peso, which has fallen by 12 percent since December 2021, is not alone in its plight.

The Japanese yen has lost around 20 percent in value against the US dollar, while the Korean won has slid around 17 percent in the same period. Other Asian currencies depreciated by around 8 percent on the average.

“So, it is really not so bad in terms of competitiveness, if we consider that all the other currencies have depreciated too,” said Barlis.

While he thinks the peso can depreciate a bit more above 57.00 in the near term, there are signs of stalling and should settle at around PHP 56.45 to PHP 56.50 to the dollar by the end of the year.

‘Imported inflation’

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Currencies 3 MIN READ

Exchange rates: A game of tradeoffs

Who wins and who loses when the peso appreciates or depreciates? Who determines the price of the peso in a floating exchange rate regime? Contrary to what most may think, it is neither the BSP nor the government that sets the price.

July 19, 2022By Anna Isabelle Lejano

With the peso breaching PHP 56 to a dollar, concerns over a weakening economy have been raised. This depreciation was caused by surging global prices due to energy supply chain disruptions from the Russian-Ukraine conflict and the subsequent US Federal Reserve (Fed) rate hikes to tame inflation, strengthening the US dollar. Now, what are the implications of this depreciation? And what are the tradeoffs?

A peso depreciation can make imports more expensive since it costs more in Philippine pesos to buy foreign goods. Basic commodities also become more costly with rising inflation, and debt that is denominated in foreign currency gets bloated.

On the other hand, a depreciated peso also has its benefits as it can help increase dollar inflows. It can boost exports since trade partners can buy more goods and services from the Philippines using the same amount of US dollars, which results in the competitiveness of the country’s products.

It can also make tourism, particularly accommodation and other travel-related amenities, more affordable for international tourists. Additionally, families receiving remittances from overseas Filipino workers (OFWs) will see more pesos for every dollar sent home. There would also be an increase in the value of the dollar earnings of the Business Process Outsourcing (BPO) sector. Also, a depreciated peso can serve as a deterrent to buying non-essential imports, which can help conserve dollars.

The reverse process goes for peso appreciation. An appreciated peso would make exports more costly and would result in a less competitive BPO and tourism sector. It would also lower the peso value of OFW remittances. On the upside, it could make imports cheaper, reduce consumer prices or temper inflation, and shrink the value of foreign currency-denominated debt. On the other hand, it can induce the buying of non-essential imports, which can deplete dollar reserves.

All about tradeoffs

So, is there a real answer as to which is better? Is it currency appreciation or depreciation? An exporter would want a depreciated currency, but an importer would want otherwise. Would you side with the exporter or the importer? An OFW would want a depreciated peso, but this might elevate prices back at home. Would you side with the OFW?

This goes to show that there are no real solutions or answers. There are only tradeoffs. With this, the tension between these tradeoffs pushes the market towards one way or another, towards appreciation or depreciation. That is, it is the market that gets to decide where the exchange rate would be.

Since there are only trade-offs, what is clear is that a too fast appreciation or depreciation can destabilize markets. Ideally markets best operate in a smooth and regular way, able to sort things out in an orderly fashion. The chaos and confusion caused by very fast currency movements can result in market panics that only make things worse as players exaggerate market swings and make adverse self-fulfilling prophecies.

This is where the BSP comes in. It manages volatility because it does not want too fast movements in the exchange rate. It does not set the exchange rate itself, but it can buy or sell dollars in the markets to manage volatility or tweak policy rates to contain inflationary pressure from a fast-depreciating peso. However, neither the BSP nor the government actually decides who wins or who loses. In the end, it is the market that decides in this ever-moving game of trade-offs.

ANNA ISABELLE “BEA” LEJANO is a Research & Business Analytics Officer at Metrobank, in charge of the bank’s research on the macroeconomy and the banking industry. She obtained her Bachelor’s degree in Business Economics from the University of the Philippines School of Economics and is currently taking up her Master’s in Economics degree at the Ateneo de Manila University. She cannot function without coffee.

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Currencies 4 MIN READ

A perfect storm for the Philippine peso

Many factors are contributing to the peso’s woes. Inflation in the US is a major one. High inflation, however, may be over in a few months, if history is any guide.

July 18, 2022By Ruben Zamora

Despite the peso appearing oversold a few weeks ago, the local currency has continued to weaken against the US dollar. It seems it’s only a matter of time before the peso will breach the all-time exchange rate high of PHP 56.45 to the dollar in March 2004. From there, it’s uncharted territory.

As discussed in my previous article, the main driver of the abrupt peso weakness has been the stark difference in the path of US interest rates compared to that of peso interest rates. Since late May, global markets have been pricing in a faster pace of increase in US interest rates, and, naturally, as the rate of return in a currency rises relative to others, the more attractive that currency becomes.

Fast forward to mid-July and what was already an incredibly fast pace of rate hikes in the US by historical standards has sped up even more after the higher-than-expected inflation print in June of 9.1%. Take a second to digest that: over 9 percent inflation.

The US Federal Reserve has made it clear that they are willing to do everything to cool inflation down, but this latest data point suggests that what they’ve done so far (and what they’re saying they’ll do) hasn’t been enough. This means that the Fed has no other choice but to carry on raising rates until its effects translate into stabilizing prices.

Rising inflation, rising rates

The market is worried, however, that if inflation keeps surprising on the upside, then US rates will need to continue rising higher and sooner. This level of worry has reached a point that even the Banko Sentral ng Pilipinas’ surprise off-cycle rate hike of 75 basis points (bps) on July 14, an attempt to stem the slide of the peso, was effectively shrugged off.

The Monetary Board’s next rate policy setting meeting is scheduled for August 18, and based on recent memory, it has revised its benchmark policy rates outside of the official meeting only once, back in March 2020 at the very onset of the COVID-19 pandemic to support the banking system and prevent panic setting in the economy.

The 75-bp hike is also much higher than what the BSP had been saying (i.e., 25 bps or 50 bps hike) for the August 18 meeting. In other words, this decision was a major tectonic-level shift in the BSP policy, and it was designed to shock and awe the forex market. It didn’t have the desired effect.

Confluence of factors

It seems the peso is caught in a perfect storm—a jittery global market that views any sign of a more aggressive US rate hike as enough reason to sell risk. This includes emerging market currencies (i.e., flight to safety) and peak import season in the Philippines, which means the third quarter seasonally sees the strongest level of demand for the US dollar. It also includes a widening current account deficit driven by rising coal and food prices, most of which are imported and hence priced in US dollars.

The BSP has not been alone in having to adjust its interest rate policies, with central banks in both developing and advanced economies forced to keep pace with the US Fed to defend their respective currencies. The euro has experienced one of the deepest currency depreciations year-to-date, which explains in part the European Central Bank’s (ECB) guidance for a 25 bps hike on July 21st.

Follow the leader: Many countries are keeping up with the US with regard to setting policy rates in order to protect their own currencies. 

Except for Brazil, most currencies have depreciated against the US dollar.

What now?

Despite this cloudy outlook for the peso in the near-term, the BSP’s unexpected move from “dovish” (i.e., keep rates lower for longer to support growth first) to “hawkish” (i.e., defend the peso to avoid importing more inflation) should at the least help slow the depreciation of the peso against the US dollar. Given the more defensive stand on the peso, the BSP may also re-activate previous actions of supplying US dollars to create a “more orderly” foreign exchange spot market.

The fiscal side of the government, led by the Department of Finance, can also help by attracting more foreign capital into the market, and hence increasing the supply of dollars via direct investments. It begins with preserving the investment grade rating of Philippine sovereign bonds, which involves clearly laying out policies that would target a lower fiscal deficit and hence less government borrowing while supporting the country’s productivity, i.e., continuing the infrastructure build-out. While these may be aspirations in the medium-term, sending the right signals to the market will still help.

High inflation never lasts long

Ultimately, the fate of the peso still rests on what the US Fed will do, which in turn will be dictated by signs that inflation in the US is peaking. These signs remain elusive, but as John Authers, a columnist from Bloomberg, wrote in his recent article, “it is the nature of things for inflationary peaks to be over swiftly and followed by sharp declines. History, going back more than a century, shows that inflation never stays as high as it is now for more than a matter of months (outside of wars and the 1970s stagflation)”.

In the meantime, we still see any drop in the peso-dollar exchange rate below PHP 56 as a chance to buy, even though it is much higher than it used to be.

RUBEN ZAMORA is First Vice-President and Head of Institutional Investors Coverage Division, Financial Markets Sector, at Metrobank, which manages the bank’s relationships with Non-Bank Financial Institutions, including government financial institutions, insurance companies, and asset managers. He is also the bank’s Financial Markets Strategist, focusing on fixed income and rates advisory for our high-net-worth-individual and institutional clients. He holds a Master’s in Business Administration from the University of Chicago Graduate School of Business. He is also an avid traveler and golfer.

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