Currency traders are changing their strategies in anticipation of a discount in rates of interest, and in this example, the Philippine peso appears to be a beautiful option. Historically, amongst other Southeast Asian countries, the peso has been the currency least affected by monetary easing.
The peso, cited by Bloomberg, doesn’t typically weaken significantly and even strengthen when rates of interest are loose. Data since 2007 show that the Philippine peso has a weak monthly correlation of minus 0.3 with the Philippine rate of interest. Meanwhile, currencies reminiscent of the ringgit, baht and rupiah are likely to weaken against the US dollar when domestic rates of interest decline.
The rise of the Philippine peso didn’t end there. The strengthening of the currency is supported by high rates of interest within the region, and the Central Bank of the Philippines is implementing an aggressive policy of controlling inflation. This gives the Philippines a bonus within the face of US Federal Reserve rates of interest. Additionally, the regular inflow of remittances from Filipinos working abroad can also be a positive factor as foreign earnings are converted into Philippine pesos.
A Bloomberg survey of analysts predicts that the Philippine peso will proceed to strengthen in the approaching period, with the exchange rate expected to achieve 54 per US dollar within the fourth quarter and 52.9 next 12 months.
The importance of maintaining peso exchange rate stability is a top priority for the Philippine government in curbing inflation. Therefore, the central bank will not be expected to chop rates of interest before the central banks of neighboring countries. This belief is predicated on the incontrovertible fact that the Philippine peso has less foreign ownership of local currency bonds in comparison with its neighbors.
Additionally, the Philippines also advantages from money sent home by Filipinos working abroad. This is a trend that will not be as visible in neighboring countries. According to a World Bank report, remittances of $33 billion by 2022 will account for about 8% of the Philippines’ gross domestic product, the best amongst major Asian countries.
Thanks to strong exchange rate stability, tight monetary policy and money flow support, the Philippine peso is a beautiful and resilient currency within the face of rate of interest easing turmoil.
Source: Bloomberg
