Foreign exchange traders are changing their strategies in anticipation of a rate cut, and in this situation, the Philippine peso seems to be an attractive option. Historically, the peso has been the least affected currency by monetary easing among other Southeast Asian countries.
Quoted from Bloomberg, the peso tends not to weaken significantly or even strengthen when interest rates are loose. Data since 2007 shows that the Philippine peso has a weak monthly correlation of minus 0.3 to the Philippine policy rate. Meanwhile, currencies such as the ringgit, baht and rupiah tend to weaken against the US dollar when domestic interest rates are cut.
The Philippine peso's gains did not stop there. The strengthening of the currency is supported by high interest rates in the region, with the Philippine central bank implementing aggressive policies to control inflation. This gives the Philippines an edge in the face of US Federal Reserve interest rates. In addition, the constant flow of remittances from Filipinos working abroad is also a positive factor, as those foreign earnings are converted into Philippine pesos.
A Bloomberg survey of analysts forecasts that the Philippine peso will continue to strengthen in the coming timeframe, with the exchange rate expected to reach 54 per US dollar in the fourth quarter and 52.9 next year.
The importance of maintaining the stability of the peso exchange rate is a top priority for the Philippine government in curbing inflation. Therefore, the central bank is not expected to cut interest rates before the central banks of neighboring countries. This belief is based on the fact that the Philippine peso has lower foreign ownership of local currency bonds compared to its neighbors.
In addition, the Philippines also benefits from money sent home by Filipinos working abroad. This is a trend that is not so apparent in neighboring countries. In a World Bank report, remittances of $33 billion by 2022 account for about 8% of the Philippines' gross domestic product, which is the highest among major Asian countries.
With strong exchange rate stability, tight monetary policy, and the support of remittance flows, the Philippine peso is an attractive and resilient currency amidst the turmoil of interest rate easing.
Source: Bloomberg
