Strategists anticipate the Philippine peso's recent rally will be short-lived, with seasonal selling expected to push the currency to new record lows. Over the past decade, the peso has weakened by an average of 1.6% against the dollar in the third quarter, making it the worst-performing three-month period. This is attributed to local companies buying more dollars to finance imports ahead of the year-end holiday season. Michael Ricafort, an economist at Rizal Commercial Banking Corp., highlights this "seasonal increase in demand for US dollars by importers" in preparation for year-end demand.
The peso is also under pressure from other factors, including a widening balance of payments deficit, sluggish economic growth since the pandemic, and weak household spending. The country's GDP grew by only 2.8% in Q1, the slowest pace outside the pandemic since late 2009, and household spending was the weakest since 2010. The central bank projects the balance of payments deficit will widen significantly to $10.7 billion this year, up from an earlier estimate of $7.8 billion, primarily due to global growth constraints from Middle East tensions.
Several analysts forecast a significant depreciation of the peso. Some predict it could fall to as weak as 62 per dollar this quarter, compared to its recent close of 61.51. ANZ forecasts the peso may weaken to 62.5 per dollar by the end of September. Kausani Basak, a foreign-exchange analyst at Australia & New Zealand Banking Group Ltd., expects the peso to "underperform most Asian currencies" due to its soft domestic growth, persistent external pressures, and a large trade deficit, which makes the Philippines more vulnerable than its regional peers. A hawkish Federal Reserve could further exacerbate depreciation pressures.
Despite the recent rally following a US-Iran ceasefire in June, which temporarily boosted the peso by over 1% and lowered oil prices, these gains have since been erased. The peso had previously hit a record low of 61.750 per dollar in April. While the Bangko Sentral ng Pilipinas (BSP) is expected to maintain a hawkish stance and potentially hike interest rates further, possibly by an additional 50 basis points, to curb inflation and insulate the currency from extreme volatility, these domestic efforts may be insufficient to fully counteract the external headwinds and seasonal selling pressures.
Christopher Wong, a strategist at Oversea-Chinese Banking Corp., emphasizes that "Domestic fundamentals still need to improve for peso gains to extend more convincingly." He also notes that the peso's trajectory will be heavily influenced by whether oil prices remain lower for longer and if hawkish bets for the Fed abate. The upcoming remittance data, following a 2% growth in April which was the slowest since May 2022, will be a key indicator for the currency's performance.
