Analysts at MUFG Global Markets Research predict that the Philippine peso could further decline to between 62 and 63 per dollar. This forecast is influenced by the ongoing war in the Middle East and the hawkish policies of the US Federal Reserve.
Currently, MUFG's baseline estimate suggests the peso will trade between 60.5 and 61.5 in the near term. However, the bank warns that extended conflict and delayed rate cuts by the Fed could exacerbate pressure on the currency.
In a risk scenario of prolonged conflict, we continue to see the Philippine peso as vulnerable and USD/PHP rising towards 62 to 63, especially if this is combined with a hawkish Fed.
MUFG Global Markets Research
Last week, the peso hit a new record low of 61.75 before slightly recovering. Markets were closed on Friday in observance of Labor Day.
The Fed recently maintained its benchmark interest rate between 3.5% and 3.75%, highlighting ongoing inflation concerns fueled by rising global energy prices. This decision has strengthened the dollar, contributing to the peso's decline.
While a weaker peso can benefit overseas Filipino workers by increasing the value of remittances and providing exporters with a competitive edge, it also raises the cost of imported goods and increases the peso's burden on foreign-currency debt.
Despite the recent depreciation, the Bangko Sentral ng Pilipinas (BSP) raised its key interest rate by a quarter point to 4.5% on April 23, marking the first tightening in over two years.
Looking ahead, MUFG anticipates that delayed easing by the Fed starting in September, along with potential BSP rate hikes, may help stabilize the peso.
However, the bank also notes that the peso remains undervalued compared to fair value, suggesting that it could take about seven months for the exchange rate to adjust significantly.