LONDON: There might still be some mileage in holding the Philippine peso against the US dollar even though it is already the best performing emerging Asian currency in the year to date.
There is, of course, a risk of arriving late at the party given that the peso has already strengthened nearly 6 percent against the dollar in 2012, but there are arguments for the Philippine currency’s strong run to continue.
The Philippines central bank seems comfortable with the peso’s firmness, despite this year’s appreciation.
The peso remains competitive and its strength against the dollar is due to the Philippines’ strong economic fundamentals, central bank Governor Amando Tetangco said on Oct 5.
Tetangco has a point.
While Trade Secretary Gregory Domingo does not expect the government’s 10 percent export growth target to be hit in 2012, the increase should still be a relatively healthy 5 to 7 percent.
The government is optimistic the country can accelerate economic growth to 5-6 percent this year from 3.9 percent in 2011 in part powered by robust remittances from Filipinos working and living abroad.
Those cash remittances, which help power domestic consumption, are expected to increase 5 percent this year, albeit slowing from growth in 2011 of 7.2 percent.
Data released by the central bank yesterday showed remittances in August rose a strong 7.6 percent year-on-year.
Those flows also underpin demand for the Philippine peso.
Admittedly, there is a chance that the central bank will cut its key overnight borrowing rate from the current 3.75 percent at its Oct. 25 policy meeting, especially as inflation remains under control.
But cutting the benchmark interest rate arguably from a position of strength might merely encourage more capital inflows particularly as, with derisory returns in many major economies, even a reduced headline yield might still be attractive.
Capital inflows in September jumped 172 percent year-on-year, underscoring investor appetite for Philippines’ assets.
Yesterday’s signing of a peace deal between the government and the Moro Islamic Liberation Front, could be the first step to ending more than 40 years of conflict.
Resolving the conflict would give the Philippines a peace dividend, and would probably prompt further inward capital investment.
Potential investors in the peso might also find support for their positions in recent remarks from US Federal Reserve Chairman Ben Bernanke.
He argued on Sunday in Tokyo that if emerging economies stopped intervening and allowed their currencies to rise, this would help insulate their financial systems from external pressure.
“Under a flexible exchange-rate regime, a fully independent monetary policy, together with fiscal policy as needed, would be available to help counteract any adverse effects of currency appreciation on growth,” Bernanke said.
It is unknowable whether or not Philippines policymakers buy into the US Fed chief’s argument but if so, that would also lend support to the idea that the Philippine peso may still have some room to strengthen.
A break below the Sept. 14, 2012 low of 41.235 might lead traders to contemplate a slide to levels below 41.000 and toward the 40.120 level not seen since Feb. 27, 2008.
— Neal Kimberley is an FX market analyst for Reuters. The opinions expressed are his own.
