The peso and the stock market tumbled Wednesday, with the local currency slumping to its weakest level in nearly 12 years.
The peso breached the 53-per-dollar boundary while stocks plummeted, pulled down by external and domestic factors, including the expected another interest rates hike by the US Federal Reserve and the Philippines’ widening trade deficit.
The peso lost P0.28 to close at 53.23 per dollar from 52.95 on Tuesday. It was its weakest level since the 53.55 on June 29, 2006. Total volume traded stood at $773 million, up from $653 million previously.
The peso opened Wednesday’s trading five centavos weaker at 53 per dollar and at one point touched 53.26.
“External factors include the continued tightening of US monetary policy with an expected Fed Funds rate hike at today’s meeting, heightened risk of a fourth Fed rate hike this year, gradual reduction of global liquidity as Fed’s balance sheet is reduced,” ING Bank Manila senior economist Joey Cuyegkeng said in a reply to an emailed query.
“... The possibility that ECB [European Central Bank] may signal tomorrow the start normalization of monetary policy, higher interest rates and bond yields raise also refinancing and funding costs of EM [emerging markets] sovereign and corporations leading to possible credit quality risks resulting to a more cautious exposure to EMs, continued elevated oil and commodity prices,” he said.
He said factors that have been dragging down the local currency in the local front were the wider trade deficits, inadequate remittances from overseas workers and outsourcing net inflows leading to wider current account deficit.
Cuyegkeng said enhanced fiscal deficit spending while enhancing growth prospects driven by strong domestic demand also meant higher imports (and wider trade deficits).
He said Bangko Sentral’s mixed signals on monetary policy with the market considering a dovish stance after the May 10 policy rate hike, greater tolerance of a weaker peso, and a perceived sustained weakening of the peso also raised the need for import-dependent corporations to continue hedging their foreign exchange requirements.
“Net capital inflows or FDIs may not be enough to cover the wider current account deficit despite a still high FX reserve,” Cuyegkeng said.
DBS Bank of Singapore in a report Tuesday predicted that the peso might depreciate further to 54 per US dollar by the end of the year due to the ballooning trade deficit.
The local currency on Monday closed at 52.95, P0.25 lower than 52.70 at the close last Friday. It was its weakest level in almost 12 years since 52.98 on July 3, 2006.
DBS said the peso had depreciated 5.8 percent year-to-date, more than the full-year depreciation of 5.4 percent and 4.7 percent in 2016 and 2015 respectively, to become the weakest currency in Asia, excluding Japan.