(Bloomberg) -- The Philippine peso’s rally in the first half of the year is rapidly unwinding as rising global trade-war fears and faltering economic growth pummel the currency. Further losses may be in store.
The currency has fallen back from near an 18-month high set in late July as overseas investors sold local stocks, while the central bank cut interest rates for a second time this year and signaled more to come. The peso may weaken about 4% by year-end given the prospect of further escalation in U.S.-China trade tensions, according to ING Bank NV.
“I’m not positive on the peso,” said Nicholas Mapa, a senior economist at ING in Manila, who previously worked at the central bank. “Starting in August, the peso faced a weakening bias largely due to the protracted sell-down of Philippine stocks by foreign players.” Traders have every reason to seek a haven until the narrative improves, he said.
The peso has dropped 2.2% from its July 31 high of 50.81 per dollar, halting a 2.5% rally during June and July that made it the best-performing Asian emerging currency after the Thai baht. It will probably extend declines to 54.10 by year-end, ING’s Mapa said. The currency closed Wednesday at 51.935.
The ratcheting up of trade tensions saw overseas funds offload a net $226 million of Philippine equities last month, after they had invested a net $488 million through the first seven months of the year.
The sputtering local economy is also weighing on the currency. GDP growth unexpectedly slowed to a four-year low of 5.5% last quarter, the government said Aug. 8, leading the central bank to cut interest rates by a quarter-percentage point to 4.25% the same day. The economy was hampered by a four-month delay in approving the budget, resulting in a setback to President Rodrigo Duterte’s plans to revive growth through infrastructure spending.
ANZ Bearish
Australia and New Zealand Banking Group Ltd. has a negative short-term view on the peso, saying a step-up in infrastructure spending will hurt the trade balance.
“While inflation is expected to remain low for the rest of the year, in part thanks to lower global oil prices, the improvement in the trade deficit is likely near an end," said Khoon Goh, head of Asia research at ANZ in Singapore. “With the budget now passed and spending set to pick up, so too will imports." Goh sees the peso weakening to 53 per dollar by year-end.
The Philippine central bank intends to lower its policy rate by another quarter-percentage point this year, and assess if further cuts are needed, Governor Benjamin Diokno said at a Manila forum for journalists last week.
“With BSP likely to enact another rate cut soon, and with inflation likely to bottom out, real rates are turning less attractive for the peso,” said Chang Wei Liang, a macro strategist at DBS Bank Ltd. in Singapore. “Furthermore, a region-wide slowdown may dampen remittances, which could pressure the peso.”
