Peso seen to hit 30:$1 next year
By Prinz P. Magtulis (The Philippine Star) Updated November 04, 2012
12:00 AM Comments (2)
CEBU, Philippines - The peso could strengthen to the 30-level against
the dollar next year as investors continue to flood emerging markets
regardless of the outcome of the US elections on Tuesday, an investment
bank said.
In its latest research note, Bank of America-Merrill Lynch (BofA) said
it expects the peso to average 41 to a dollar by the first quarter of
2013, before appreciating further to 39.80 for the rest of the year.
BofA's forecasts are stronger than the government's official assumption
of 42-45 next year. The peso closed at 41.18 on Wednesday, the last
trading day before the holidays.
A strong peso, while making imports cheaper, also makes export products
expensive abroad, possibly denting demand. It also trims the value of
remittances from overseas Filipinos.
"In our view, there is still further upside to EMFX (emerging market
foreign exchange) in the near term. PMI data has been decent for
September following the US Fed meeting, and we think investors will
continue to push currencies higher as they await further confirmation of
improved activity," BofA explained.
The US, considered as investors' safe haven, has been struggling to
boost growth four years after the global financial crisis. Its central
bank, the US Federal Reserve, said on September it is embarking on a
third round of bond-buying program meant to flood the economy with cash
to boost demand and growth.
The Fed announcement came after US manufacturing activity hit 51.5 in
the purchasing managers' index (PMI) in September, similar from August.
A reading above 50 indicates expansion.
A strong US manufacturing performance signals economic recovery for the
world superpower and thus, should drive investors to invest in risky
assets such as the peso.
The outcome of the US elections will also only have "neutral" effect to
emerging market currencies like the peso, which BofA expects to trade at
an average of 42 this quarter.
"Market pricing of an Obama victory is mild USD (US dollar) negative.
(Mitt) Romney victory, USD positive," it said.
This indicated that the market may view a re-election of US President
Barack Obama positively, giving them confidence to acquire risky assets
and thus lowering the dollar's value. In contrast, a Romney victory is
predicted to drive investors to safe havens like the dollar,
contributing to its appreciation.
"Both a Romney win and Great Rotation pose upside risks to US rates.
Historical evidence suggests this would be bearish for EM rates but
neutral for EMFX overall – though with significant differentiation
within it," BofA said.
In an effort to tame the peso's appreciation, the Bangko Sentral ng
Pilipinas (BSP) slashed its policy rates by another 25 basis points last
Oct. 25, bringing them to new record-lows of 3.5 percent and 5.5 percent
for overnight borrowing and lending, respectively.
BSP Governor Amando Tetangco Jr. said last Monday the central bank is
looking at using its macroprudential measures to manage capital flows
which drive the peso to strengthen. These measures include tweaking the
bank reserve requirements, real estate exposure ceilings and single
borrower's limit, among others.
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