Peso may regain strength vs dollar this year – UBS

MANILA, Philippines - Regional currencies may still post gains versus the US dollar this year despite a recent sell-off that caused Asian units to weaken on fears the world superpower would withdraw its stimulus measures soon, an economist from a global investment bank said.

The Philippine peso, Malaysian ringgit and the Thai baht may “regain some of their recent losses” versus the greenback, â€ UBS economist Edward Teather said in a research note.

“Our faith in the ability of credit cycle and the global trade cycle to attract capital to Thailand, Malaysia and Philippines, has diminished but not dissipated.  The Indonesian rupiah and Indian rupee, on the other hand, may continue to suffer due to their countries’ current account deficits, he added.

For the past two weeks, Asian currencies have slid in value versus the dollar on speculations the US would stop pumping liquidity— through a so-called quantitative easing (QE) strategy --in the market.

Investors got spooked and swamped the safe-haven dollar. This caused the peso, for instance, to depreciate to the 42-level for the first time in 11 months. It closed at 42.26:$1 last Friday.

But for Teather, the perception that the US economy is finally recovering from the global financial crisis and would no longer need a boost by printing new money, may get delayed to 2014.  

 â€œWe do not expect the US Federal Reserve to reduce QE this year,” he said.

 At the most, a “stronger US dollar” could occur next year as US policymakers decide to have “less QE” on the back of sustained recovery from the financial crisis five years ago.

“We believe the credit cycle in ASEAN-5 will not be brought to a sudden halt in 2013,” Teather said.

However, since the “credit cycle is maturing” in these economies, it may not have the same “allure” to investors at it had before when huge credit was used to finance growth in the region.

Teather said that explains UBS’ slight downward projections on foreign exchange rates for ASEAN-5 this year.

Based on UBS estimates, the peso is seen to end the year at 41.50 against the greenback, just slightly weaker than the 39.50 projected earlier. It is however expected to fall to 42.50 next year.

The Malaysian ringgit, on the other hand, could hit 3.0 this year, down from the original projection of 2.8, but still better compared to the 2014 forecast of 3.1.

For the Thai baht, the exchange rate could hit 29 this year, dipping from the original 28. For 2014, it could slide to 30.

“There are also signs that our favorite lead indicators of the global trade cycle, having made gains as we hoped, are rolling over,” Teather pointed out.