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Year-end remittances may slow Philippine peso's slide

A customer handing over a peso bill at a Manila market stall. The peso has been caught in the maelstrom engulfing emerging market assets with the currency among the biggest losers in Asia this year, dropping more than 7 per cent.


THE embattled Philippine peso needs a break - and it may soon get one.

More than 10 million overseas Filipinos are preparing to send record amounts of money home for the Christmas and New Year holidays - a period when remittances pick up - with analysts from MUFG Bank Ltd and Standard Chartered plc saying that those funds will help ease pressure on the currency.

The peso, which this month sank to a 2005-low of 54.14 per US dollar, strengthened in the fourth quarter last year and in every December in the past four years. Since 2009, the highest monthly remittances value was in every December. Last year's US$2.7 billion inflow in the month was the largest ever, according to central bank data.

"The peso may see some support due to the dollar strength seen losing momentum toward the year-end and a seasonal pickup in remittances," said Teppei Ino, an analyst at MUFG Bank in Singapore. The bank forecast the currency to trade at 53.75 per US dollar by the end of the year, compared with last Friday's close of 53.97.

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The peso has been caught in the maelstrom engulfing emerging market assets with the currency among the biggest losers in Asia this year, dropping more than 7 per cent. Remittances, which totalled US$28 billion last year, are the nation's largest source of foreign exchange after exports.

"Given the bearish emerging markets environment and near-term external risks around trade tariffs, we are neutral on the peso, but remain relatively optimistic on the currency's prospects in coming months," Goldman Sachs Group Inc analysts Jonathan Sequeira, Danny Suwanapruti and Andrew Tilton said in a Sept 10 note.

They said that the peso is still about 10 per cent undervalued relative to its fair value of 49 per US dollar, according to the bank's GSDEER model, which takes productivity and terms of trade differentials into account.

Remittances probably rose 5.1 per cent in July from a year earlier, according to the median estimate in a Bloomberg survey of economists, ahead of data due today. Growth was 2.7 per cent in the first six months of the year.

Any relief rally in the peso could be brief as investors remain cautious over the nation's worsening current-account deficit. The shortfall was US$3.1 billion in the first half of the year, matching the central bank's forecast for the full year.

"The nation's current account deficit is unlikely to turn to a surplus anytime soon, and that's making it hard to expect an appreciation trend for the peso," Mr Ino said.

The prospect for more interest rate increases by the central bank could also support the currency. ING Groep NV and Capital Economics Ltd were among those predicting a rate hike this month. Bangko Sentral ng Pilipinas has delivered 100 basis points of rate increases since May, including a 50 basis point hike just in August.

The central bank plans to use some of those remittances to gradually bolster its foreign exchange reserves, deputy governor Diwa Guinigundo has said.

"We expect some recovery in the peso ahead of year-end, driven by a seasonal pick-up in remittances," said Divya Devesh, head of Asean and South Asia FX research at Standard Chartered in Singapore.

"Monetary policy has also turned more supportive. Any recovery is only likely to be temporary." Standard Chartered expects the peso to recover to 53 per US dollar at year-end. BLOOMBERG

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