Philippines' REER close to its all-time highs

According to the medium-term FX Compass valuation model, PHP appears to be one of Asia's most undervalued currencies at -27% against the USD, in order to be consistent with its sustainable current account position.

However, the more immediate issue for the BSP is that the real effective exchange rate (REER) is close to its all-time highs. 

From this perspective, the BSP will be at pains that its currency moves in line but not necessarily more than its peers. Clearly, investors could point to the fact that the REER seems to be falling already. 

However, this may be a result of the Philippines running its lowest headline CPI in history at 1.6%. This disinflationary trend is helping to make the Philippines more competitive against its trading peers. 

However, it also runs the risk that its monetary conditions are getting too tight.