Philippine Peso Continues to Weaken Against the US Dollar
The Philippine peso has continued to weaken against the US dollar, leading the USDPHP exchange rate to a few points shy of its all-time high at 59.08. The peso has slid since the BSP indicated its keenness to cut its interest rate back in April and again in May despite the jump in domestic inflation to 3.9% from 2.8% in January. Given the pair’s upside break and ongoing trend, it is highly likely that it will reach its all-time peak. It may even surpass it. As a consequence of the peso’s decline versus the US dollar, the local equities market has suffered a notable decline as foreign funds unwind their position. Foreign selling in the local market will likely persist as long as the peso remains weak. A quickly depreciating domestic currency discourages hot foreign investment inflows despite making it appear that local investments are ‘cheap’ from a dollar perspective. This is for the fact that foreign funds, at the end of the day, will always remit their investment proceeds back abroad. For example, if a foreign fund invests $1 million dollars in Ayala Land, to do so they will have to first exchange their dollars to peso, say at Php50 to $1 rate. If ALI’s share value increases by 10 percent and the exchange rate remains steady then their investment has risen by 10 percent in dollar terms. But what if ALI’s share price increases by 10 percent but the peso falls by 10 percent? Then essentially, their investment has remained flat in dollar terms. Worse, if ALI’s share price remains flat or declines and at the same time the peso also declines, then the foreign fund will see compounded losses in dollar terms. That is why a falling peso encourages foreign selling in domestic assets. This, in turn, encourages more selling, resulting to a negative feedback loop.
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