Philippine peso goes from emerging market Asia's best to worst currency in a week

Manila

THE Philippine peso turned into emerging Asia's worst-performing currency in December from being the best, as a seasonal boost from remittances petered out. Strategists see the bearish momentum continuing.

The currency dropped around 2 per cent last week, wiping out all the gains in the first three weeks of December that had made it the regional outperformer. Nomura Holdings and Barclays are among those predicting more losses in the coming months.

The peso faces headwinds from a dovish central bank that left interest rates unchanged last month and signalled that it would keep monetary policy accommodative, in contrast to a Federal Reserve set for rate hikes in 2022. It may also come under pressure from a rising current-account deficit.

"Peso is likely to be among the laggards in an otherwise higher emerging-markets real-yields world," said Ashish Agrawal, FX and EM macro strategist at Barclays in Singapore. Deterioration in the current-account balance and expectations that the Bangko Sentral ng Pilipinas (BSP) will normalise policy at a slow pace may further weigh on the peso, he said.

The peso climbed almost 2 per cent last quarter through Dec 23, supported by surging remittances and optimism over economic growth recovery. December 2021 remittances were the highest since 2009.

The currency retreated about 6 per cent in 2021 to close at 51 per US dollar on Friday (Dec 31). Barclays expects the currency to fall to 51.50 by the end of June, while Nomura sees 51.7 by the end of March. History shows it slid in January in five of the past six years as support from remittances faded.

Meanwhile, the central bank last month revised its 2021 current-account estimate to a deficit from a surplus, and forecast the shortfall will more than double to about $10 billion in 2022.

The peso ended 2021 testing a key technical level around 51 against the US dollar. A breach opens the door for it to weaken towards 51.81, the 61.8 per cent Fibonacci retracement of the pair's October 2018 to June 2021 decline.

Traders will look to inflation and trade data this week for clues on the path for monetary policy ahead. Governor Benjamin Diokno said preserving monetary support will help the nation's recovery from the pandemic. "The BSP will keep an accommodative policy to support growth, and if you're going to keep interest rates low, the peso will depreciate," said Jonathan Ravelas, chief market strategist at BDO Unibank in Manila. BLOOMBERG