Peso to move sideways amid rate worries

THE PESO is expected to move sideways against the dollar this week as strong US consumer spending data fueled expectations of more rate hikes from the US Federal Reserve.

The local currency closed at P54.87 versus the greenback on Thursday, appreciating by 31 centavos from Wednesday’s P55.18 finish, Bankers Association of the Philippines data showed.

Philippine financial markets were closed on Friday for a special non-working day.

Week on week, the peso strengthened by 37 centavos from the previous week’s P55.24 close.

For this week, a trader said in a Viber message that the peso might depreciate against the dollar as US consumer spending increased by the most in nearly two years or since March 2021 to 1.8% last month.

Also, the personal consumption expenditures price index, the Fed’s preferred inflation measure, accelerated by 0.6% last month, the biggest increase in six months, bringing the index to 5.4% for the 12 months through January.

The strong data stoked worries the Fed will prolong its tightening cycle.

“The peso so far has been performing better, thanks to the recent BSP (Bangko Sentral ng Pilipinas) hike and BoP (balance of payments) data. But the US rate remains to be a threat as it will continue to strengthen the dollar,” the trader said.

Meanwhile, Union Bank of the Philippines, Inc. Chief Economist Ruben Carlo O. Asuncion said in a report that the dollar could weaken in the short term as the market prices in the “higher for longer US rates narrative.”

He said the BSP’s hawkish stance could also boost peso sentiment.

The US central bank hiked its target interest rate by 25 basis points (bps) in its Jan. 31 to Feb. 1 meeting to a range between 4.5% and 4.75%. This brought cumulative increases since March 2022 to 450 bps.

The Fed’s next policy meeting is on March 21-22.

Meanwhile, BSP Governor Felipe M. Medalla last week said the Monetary Board will likely hike benchmark interest rates again next month, with a smaller 25-bp move possible amid expectations of slower inflation in February.

The BSP hiked borrowing costs by 50 bps for a second straight meeting on Feb. 16, and hinted at further tightening to help bring down elevated inflation.

This brought the central bank’s policy rate to 6%, the highest in nearly 16 years or since May 2007 when it stood at 7.5%.

It has now raised borrowing costs by 400 bps since May 2022.

The Monetary Board’s next policy review is on March 23.

For this week, the trader expects the peso to move between P54.50 and P55.50 against the dollar, while Mr. Asuncion sees the local unit trading at P54.50 to P55.25.

Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort said in a Viber message that the peso could close at P54.70 to P55.20 against the dollar this week. — A.M.C. Sy