BSP sees further support for stronger peso

MANILA, Philippines - Certainty the US recovery is on track with a boost from the Federal Reserve and spending cuts being averted by Friday will likely support further strengthening of the peso, the central bank said.

“We expect to see the continued effects of market risk on/risk off behavior, until clearer signs on the US growth become evident. Given the market’s tendency to overshoot, such risk on/off behavior could lead to volatility,” Bangko Sentral ng Pilipinas (BSP) Governor Amando Tetangco Jr. said.

 â€œThis volatility could still be skewed towards an appreciation in (emerging market economies’) currencies, but perhaps not to the same degree as we had seen in the recent past,” he said in a text message to reporters yesterday.

In his testimony before US Congress Tuesday, Fed Chairman Ben Bernanke defended monetary officials’ decision to flood the economy with $85 billion worth of new money by buying securities in a bid to boost economic growth.

He argued risks of asset bubbles due to intensive risk taking “do not outweigh” the benefits of driving consumers to spend more, promote job creation and in the long run, support growth.

While it remains to be seen if such policy will hold up US growth over the long term, Tetangco said the immediate effect of driving inflows to higher-yielding emerging markets should be watched.

The “spillover,” he said, could drive the peso’s appreciation in the near-term even as the local unit has already gained by roughly one percent against the dollar so far this year. That could be aided by certainty the $85-billion in immediate budget cuts will not take effect tomorrow, March 1.

 â€œGiven what transpired at yearend, most analysts have probably not factored in ‘sequestration’ (or the automatic spending cuts) in their baselines,” Tetangco said.

As per BSP data, the peso’s appreciation by 6.8 percent last year versus the dollar was the second best in Asia, putting a dent on export and business process outsourcing earnings as well as remittances.

Such strength has been backed by huge inflows seeking higher returns in developing nations. Tetangco said these could persist or shift back to the US depending on how the US Congress will address the looming budget problem.

“Again, what we could see in the market is a move to safe haven. But what that safe haven is would depend on risk appetite at that point,” Tetangco said.

“Given the US market is still the biggest and most liquid, we could see a shift away from (emerging market economies) risk. But if the markets believe a deal is forthcoming, then such shift may not materialize,” he explained.

Tetangco himself is optimistic a deal will be achieved just in time, thus helping “cement” the US recovery from the drag caused by the 2008 global financial crisis.

This, in effect, could bode well for trading partners like the Philippines, which saw the US as its third largest export market and import source last year, according to census data.

As for the BSP, Tetangco said it will remain watchful to ensure the capital behavior - which relies on developments here and abroad - remains manageable.

“BSP will consider further macroprudential measures as appropriate, to aid market participants in correctly pricing and perceiving risks. We could also further refine our conduct of monetary operations,” he said.