Peso seen strengthening to 40 to $1

MANILA, Philippines -  Investment banks Bank of America — Merrill Lynch and Barclays Capital Ltd. see the peso strengthening to as high as P40 to $1 this year amid the strong remittances from Filipinos abroad.

In a research note Bank of America — Merrill Lynch said that the local currency would likely appreciate by 7.5 percent to 40.50 to $1 by the end of 2011 and could emerge as a potential star performer among Asian currencies this year.

“We believe the positive influences from macroperformance, valuation, light market positioning and fiscal standing are increasingly aligned to bolster further currency appreciation,” the bank said in a research note.

It added that the peso is currently undervalued as the local currency’s fair value stands at 40 to $1. The market holds a more conservative outlook of P42 to $1 this year.

The investment bank said the continued strong inflow of overseas Filipino workers’ remittances would continue to be a strong and reliable pillar for the local currency.

“Remittances have a non-trivial influence on the Philippines’ current account and savings-investment norm. We expect this formidable influence to underpin the peso’s prospects in a more sustainable manner this year,” Bank of America – Merrill Lynch added.

The Bangko Sentral ng Pilipinas (BSP) reported yesterday that OFW remittances grew by 8.2 percent to a new record level of $18.763 billion last year from $17.348 billion in 2009.

On the other hand, Barclay Capital economist Prakriti Sofat believes that the peso would weaken to 42.50 to $1 over the next three months before strengthening to 40 to $1 at the end of the year on the back of strong OFW remittances.

The London-based investment bank sees OFW remittances growing by nine percent to $20.5 billion this year due to robust deployment and strong growth across the region.

“We believe that the BSP will use currency strength as a first line of defence against rising imported price pressures,” Sofat said.

In a study, Sofat explained that the BSP would continue to leave all options on the table but would continue to maintain its key policy rates at record lows until the middle of the year.

The BSP slashed its key policy rates by 200 basis points between December 2008 and July 2009, bringing the overnight borrowing rate at a record low of four percent and the overnight lending rate at six percent. The BSP has kept the rates unchanged for 14 straight policy setting meetings.

“However, our sense is that the central bank is leaving all options on the table for now and the exact timing of the rate move will depend on: (1) whether the increase in commodity prices is sustained, and (2) the extent to which the central bank uses FX as a tool to contain inflation,” Sofat said.

The peso yesterday weakened to 43.72 from Monday’s 43.655 to $1.