UBS Securities Pte. Ltd. sees peso weakness in 2014, on higher US dollar rates and a stronger US dollar.
UBS analyst Edward Teather said many Asian central banks, including the Bangko Sentral ng Pilipinas, buy US dollars (to increase their foreign reserves) when their currencies are under pressure to appreciate.
The purchase of more foreign reserves causes the domestic money supply to expand, which then must be sterilized usually with central bank debt or by adjusting reserve requirement ratios on deposits.
UBS said the process flows in the other direction when currencies are under pressure to depreciate.
The US dollar appreciated on bets of interest-rate hikes next year.
“We foresee peso weakness in 2014 in the face of higher US dollar rates and a stronger US dollar,” he said.
Having appreciated in two years prior to 2013, UBS said the peso underperformed the baht and ringgit in 2013, suffering more than those economies from the incremental tightening of global monetary conditions and an increase in the supply of pesos at home.
“Counter to our expectations, the peso showed stability in 2014; benefiting from a credit-rating upgrade by Standard & Poor’s and low US rates,” UBS said.
Obviously exchange rates affect inflation and trade.
“One of the reasons to look at exchange rates in Asia is because most central banks like ‘to lean against the wind’ and in doing so, affect domestic liquidity conditions,” UBS said.
Meanwhile, BPI Asset Management said peso weakened against the US dollar as fears over the health of the Russian economy and the Federal Reserve’s (the Fed’s) hawkish statement improved appetite for the dollar.
BPI Asset Management said the Fed statements have only reaffirmed views of more divergent monetary policies next year.
“Notwithstanding the weak global economic outlook and the impact of low oil prices on inflation, the Fed remains on track to begin hiking interest rates in 2015,” BPI said.
Investors found some relief after Fed Chairman Janet Yellen hinted that the liftoff in the next two quarters is very unlikely.
“With the conclusion of the two-day Federal Open Market Committee meeting last week, financial markets will take guidance from the continued volatility in oil prices and from developments in Russia.
“The failure of the Russian central bank to contain the ruble’s depreciation, despite the significant interest-rate hike that will put their economy at risk, has sparked concerns of a possible contagion in the emerging-markets space,” BPI said.
“This new development has prompted foreign-fund managers to reassess their strategy as they position for 2015. For the rest of the year, we expect muted volumes as fund managers take a defensive stance in light of these recent developments,” it said, adding that “the events overseas will continue to dictate the direction of the local currency.”