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Philippines peso is not expected to strengthen further after falling towards key support levels, owing to the recent weakness in the United States dollar, according to the latest report from ANZ Research.
The Philippine peso has a strong tendency to weaken in the month of June. This weakness is broad-based against most currencies. Against the USD, the peso has depreciated in 16 out of the last 19 years in June. The average spot decline is 0.9 percent. The average depreciation during the years when this seasonal pattern plays out is 1.3 percent.
"We believe the main reason behind PHP weakness in June is due to the start of the import season in the Philippines. Demand for USD to pay for imports, not just for June but also in the following months, are behind the peso’s decline," the report added.
There has been an improvement in the Philippines’ trade deficit this year, largely on account of lower imports. But at USD3.25 billion, the monthly average deficit in Q1 2019 is still sizeable even though this is down from the USD4.2 billion monthly average in Q4 2018.
Part of the improvement in the trade deficit has been due to delays in enactment of the 2019 budget. This resulted in a large contraction in public construction investment, which is why imports were weaker.
With the 2019 budget now passed, the infrastructure development will start to ramp up, alongside an expected rise in import demand. Hence, the improvement seen in the trade deficit will likely turn in the second half of the year, especially with exports expected to remain weak given the uncertain external environment.
The recent weakening in the USD on the back of growing expectations of Fed rate cuts has seen USD/PHP fall towards key support levels. While it is possible that further dollar weakness could see further declines in USD/PHP, we see downside from here as limited. There will be strong importer demand for dollars at these levels, especially as we are at the start of the import season.
"In addition, we expect BSP to follow up their May rate cut with two further 25bp cuts later in the year, taking the policy rate to 4.00 percent. Recent comments from BSP Governor Diokno suggest that there is a possibility that the monetary policy easing cycle could be more aggressive than what we expect, including further reserve requirement ratio (RRR) cuts on top of the 200bps that have already been announced. More aggressive easing will help support economic growth, but will also lead to more demand for imports, resulting in a further increase in the trade deficit," ANZ Research added in its comments.
