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Economics – Markets – Strategy
Currencies
Philippine peso – deep retracement on less favorable fundamentals
In our last quarterly, we expected USD/PHP to head up in 2Q08, as it normally
does during the second quarter of the year. We also reined in our bullish PHP
expectations because the factors that were responsible for the PHP’s three-year
rally between 2005 and 2007 have started to weaken. The deterioration was,
however, not severe enough for us to abandon our expectations for PHP to
appreciate for a fourth year. Back then, the USD continued to be stressed by the
US mortgage/credit crisis.
Nonetheless, the PHP’s weakness in 2Q08 turned out to be more significant than
we had expected. Unlike past years, Bangko Sentral ng Pilipinas’ (BSP) interventions
were aimed at curbing currency depreciation, and not to slow appreciation.
More worryingly, USD/PHP traded above the accelerating depreciation band
that it has been tracking during 2005-2007. After reviewing the factors that
were responsible for the PHP’s appreciation during 2005-2007, our findings suggest
that the PHP is no longer likely to appreciate for a fourth straight year in 2008.
What changed? The PHP’s rally during 2005-2007 was characterized by rising
economic growth and falling inflation. Both the budget and current account
balances improved significantly. Foreign reserves increased sharply, thanks also
to strong contributions from overseas foreign worker remittances. As investor
confidence increased, the stock market entered into a bull run. The USD was
also weak against Asian currencies, especially after China abandoned its currency
peg in Jul 2005.
In 2008, these fundamentals turned less favorable. The economy is unlikely to
repeat last year’s stellar performance. To support growth, the Arroyo government
abandoned its goal to balance the budget in 2008. Slower growth propsects are
likely to pressure the budget deficit wider by slowing revenue collection and
increasing government spending. Meanwhile, inflation reared its ugly head,
no thanks to higher international commodity prices. Owing to more expensive
food and energy imports, the trade deficit has already widened to USD2.1bn in
1Q08. On a positive note, OFW remittances are still growing, and this should
take some pressure off the current account.
Historically, USD/PHP is known to retrace about 45% of large moves, like it did
in 1997/98 and 2000/01. Like these two episodes, the PHP is currently confronting
an uncertain global economy. Assuming that the same 45% retracement takes
place, USD/PHP could extend its rise to 47 before entering into a broad consolidation,
possibly between 41 and 47. If export competitiveness becomes a priority with
the government, the consolidation range could be narrow at 45-47 instead.
USD/PHP
forecast, eop
Latest Prev
Close 44.2 41.2
2Q08 44.5 42.5
3Q08 45.0 41.0
4Q08 47.0 39.0
1Q09 45.0 41.0
2Q09 45.0 41.0
3Q09 43.0 41.0
4Q09 43.0 41.0
BSP o/n call rate
forecast, eop
Latest Prev
Close 5.25 5.00
2Q08 5.25 5.00
3Q08 5.75 5.00
4Q08 6.00 5.00
1Q09 6.00 5.00
2Q09 6.00 5.00
3Q09 6.00 5.00
4Q09 6.00 5.00
Latest close on Jun 11
Prev close on Mar 12
USD/PHP - 45% retracements after big currency moves, before entering into a consolidation
60
55
45% retracement
of 1999-00 rise
50
45
45% retracement
of 1997-98 rise
40
35
30
25
47% retracement of 1993-94 fall
20
92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08
39