Peso seen appreciating further in 2021

MANILA, Philippines — Fitch Solutions Country Risk & Industry Research sees the peso strengthening further to an average of 47.50 to $1 next year from the projected average of 49.60 to $1 this year.

The latest foreign exchange forecast of the research unit of the Fitch Group is stronger than the previous projection of 49.75 to $1 for this year and 50.10 to $1 for next year.

“We believe the tailwinds that have driven the unit through 2020 will continue into 2021 and rising foreign interest would bolster further the unit,” Fitch Solutions said.

The peso has been an outperforming currency in 2020, strengthening 5.3 percent in the year-to-date versus 3.6 percent for the Asian dollar index.

“Key drivers of the unit’s strength have been weak domestic import demand, the Philippines’ strong external fundamentals, surprises to the upside from remittance inflows and the Bangko Sentral ng Pilipinas’ policies to curb market volatility,” it said.

Fitch Solutions believes these factors would broadly continue over the near term and would be aided by further depreciation of the US dollar.

“In addition, higher risk appetite amongst investors focusing on low external financing and fiscal risks would bolster further the unit,” Fitch Solutions said.

The resistance level of 48 to $1 is now the support level as the peso trades in a range of 46 to 48 over the near term or toward the latter half of 2021.

“From a technical perspective, the peso appears to be approaching the end of its appreciation. The unit appears overbought from a stochastic oscillator perspective, bouncing off the zero bound,” it said.

Fitch Solutions said there is scope for higher foreign inflows to drive up demand for the peso over the coming quarters as loose monetary policy stances by the major developed market central banks would entice investors into higher yielding assets, particularly those with lower risk perceptions

After slashing interest rates by 200 basis points in 2020, the BSP is seen maintaining its key policy rate at an all-time low of two percent in the first half of next year before delivering a 25 basis points hike in the fourth quarter of 2021.

Fitch Solutions said the peso has been relatively stable in the fourth quarter, partially reflecting the BSP’s interventions in the foreign exchange market but also the low risk attributed to Philippine government bonds.

It pointed out the BSP ramped up its foreign exchange purchases in the second half of the year with the peso still appreciating by 3.5 percent since the June level despite an 11.8 percent increase in the country’s gross international reserves (GIR).

“Indeed, relative to the Emerging Market average foreign exchange implied one-month volatility, the peso’s sell-off during the March market lows was relatively contained. This stability may entice investors seeking stable higher yielding investments,” it said.

Fitch Solutions said it does not expect an aggressive appreciation of the local currency through the near term.

According to Fitch Solutions, the local currency could face challenges from the resurgence in domestic novel coronavirus disease 2019 or COVID-19 cases and the re-imposition of lockdown measures.

“This has generally suppressed households’ import demand, with exporting sectors allowed to maintain operations and such supported the unit. Therefore, appreciation could prove stronger than expected,” Fitch Solutions said.

It said the narrowing of the current account (CA) surplus to one percent of gross domestic product (GDP) in 2021 before turning to a deficit of 0.4 percent of GDP in 2022 from a surplus of 3.5 percent of GDP this year would weigh on the peso.

“The worsening CA balance trajectory will weigh on the peso and could prompt speculation bets in anticipation of such depreciatory pressures, further weighing on the unit,” Fitch Solutions said.

The research unit expects the peso to depreciate to 50 to $1 level through 2022.