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USD/PHP: Can the Philippine Peso Recover?

USD/PHP: Can the Philippine Peso Recover?

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USD/PHP is trading close to record highs, heaping more pressure on the central bank to tighten policy to stem the peso’s decline against the US dollar.

The peso ‘s weakness comes as rising imports continue to widen the nation’s trade deficit, which reached a record high in June. The growing policy gap between the Federal Reserve and the Philippine central bank is also working against the peso. While the Federal Open Market Committee is ramping up efforts to cool inflation, the Philippine central bank is taking its foot off the gas. The Fed is widely expected to raise rates by 75 basis-points at the next policy meeting. Bangko Sentral ng Pilipinas on the other hand is likely to deliver smaller haikes at coming meetings.

Speaking to Reuters in August, Governor Felipe Medalla said he expects the bank to deliver one or two 25 bp hikes through year-end. Medalla added that the “things are just too fluid” to provide a definite outlook on rates. Subsequently, capital is deserting the Philippines in droves. This year, foreign investors sold over $1 billion of Philippine equities, fueling the peso’s decline. Subsequently, the central bank is draining liquidity in a futile attempt to prop up the peso. Nonetheless, USD/PHP continues to push higher.

The peso currently holds the title of the third-worst performing Asian currency this year, losing over 12% in 2022. Only the Japanese Yen and Korean won are faring worse against the greenback. According to money transfer provider WorldRemit, the peso’s decline is spurring a surge in inbound remittances.

Philippine Remittances Surge

Remittances jumped 30% in July comparted to June, as overseas workers send money to the Philippines to take advantage of the widening exchange rate. Philippine immigrant workers make up a large part of the workforce in countries like the UAE and Hong Kong whose currencies are pegged to the US dollar. Whether the increase in remittances will lift the peso remains to be seen. However, the rate is looking incredibly stretched which may forecast a sudden reversal.

Philippine Peso Price Forecast

The monthly chart shows USD/PHP’s price action is vertical. The pair is trading in an extremely steep uptrend, lifting the Relative Strength Index (RSI) to 81.63. Usually, technical traders consider an RSI above 70.00 as overbought. With this in mind USD/PHP is in a precarious position. While the fundamental factors support a stronger US dollar, technical indicators are flashing warning signs.

Taking this into account, the Philippine peso could reverse sharply in the weeks ahead. For this reason, dollar bulls are likely to be skittish and prone to profit-taking. Therefore, although we expect the US dollar to remain firm against the peso overall, we see increasing odds of a near-term correction .

USD/PHP Price Chart

Elliot Laybourne
Elliott is a former investment banker with a 20 year career in the city of London. During this time he held senior roles at ABN Amro, Societe Generale, Marex Financial and Natixis bank, specialising in commodity derivatives and options market-making. During this time, Elliott’s client list included Goldman Sachs, JP Morgan, Credit Suisse, Schroders Asset Management, and the Pennsylvania State Public School Employees Retirement System, amongst others. Today, he splits his time between Thailand and Dubai, from where he provides trading consultancy and business development services for family office and brokerage clientele.