MANILA – Fitch Solutions unit BMI on Thursday said interest rate cuts in the United States will pave the way for a rebound in the peso which has so far weakened by nearly 6.2 percent.
"Constant repricing of interest rate expectations in the US has led to much volatility in many emerging market (EM) currencies, and the peso is no exception," the BMI said in a report.
The peso, which has been hovering at more than 58 to a dollar for the past weeks, will likely continue to undergo additional volatility in the short term.
"Indeed, market participants have grown increasingly pessimistic about the US loosening cycle, with markets pricing in fewer cuts by the end of 2024 compared to the 100-150 basis points (bps) expected at the start of the year," the BMI said.
The BMI said market participants are also uncertain about the timing and extent of Fed's policy easing.
"We think that this will only materialize in September, culminating in a total of 50 bps (basis points) by year-end. Until then, constant fluctuations in market rate expectations will inject another layer of unpredictability into dollar strength, indirectly affecting the peso," the BMI said.
The BMI, however, expects that the currency will reverse its losses in the fourth quarter once the US Federal Reserve begins its monetary loosening cycle in September.
"For now, we are holding on to our forecast for the peso to reach PHP56.50/USD by year-end, implying that it will strengthen by about 4.0% from the current spot rate of PHP58.70/USD. That said, our forecast hinges on the accuracy of our Fed projection," it said.
The BMI added the peso could also rebound if the Bangko Sentral ng Pilipinas (BSP) decides to ease policy rates only after the Fed cuts rates.
While the BSP already hinted on a possible rate cut in August which is ahead of the projected Fed cut, BMI said the BSP will likely adjust monetary settings in October.
"If we are right, we could very well see the peso regain some of its footing against the greenback as market expectations reverse course," the BMI said.
"Risks to our currency forecast hinge on the timing of cuts by the BSP. If the Bank were to go ahead with monetary loosening in August, this would exacerbate weakness in the peso, potentially breaching the PHP59.00/USD level we mentioned earlier," it added.
For 2025, the BMI expects a "slight strengthening of the peso" due to the projected 200 bps cuts by Fed.
It forecast the peso to settle at PHP55 to a dollar by the end of 2025. (PNA)
