Philippines Draws Line in Sand for Peso as Asian Currencies Reel

(Bloomberg) — The Philippines is defining the limit of its tolerance for peso weakness, as Asian central banks grapple with the mighty US dollar.

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The peso slumped to a record low of 59 against the greenback in late September, but has held near that level ever since. Bangko Sentral ng Pilipinas has repeatedly said it’s not defending a specific target, but analysts say authorities have drawn a line in the sand to prevent the peso from piercing the key psychological level of 60 per dollar.

Global central banks are starting to diverge in their approach to managing volatility in response to the unrelenting strength of the US dollar, with the Philippines now joining China and Japan in defending a specific level. Most other central banks are sticking with efforts to curb volatility, while some including Vietnam’s have signaled they’re willing to tolerate more currency weakness.

“Some central banks try to draw a line in the sand but in a strong dollar environment, foreign-exchange intervention can only go so far and defending a particular level may be a fool’s errand,” said Eugenia Victorino, head of Asia strategy at Skandinaviska Enskilda Banken AB in Singapore. “I expect at least one more round of dollar strengthening. So Asian central banks must conserve their fire power.”

Peso Defense

In the Philippines, the peso’s weakness has already drawn the attention of President Ferdinand Marcos Jr., who said this week the nation is prepared to defend the currency.

“We intervene. We won’t tell you which days and at what rates,” Governor Felipe Medalla told Bloomberg News in a mobile-phone message earlier this week.

Intervention can be costly. Asian nations spent about $50 billion of their foreign-exchange reserves last month — the most since March 2020, according to Exante Data Inc. Bangko Sentral has drained billions of dollars from the nation’s reserves, which have fallen more than 14% this year.

“The BSP does not normally react too much to movements in the exchange rate in keeping with our market-determined exchange rate policy,” Medalla said in a speech, a copy of which was posted on the BSP website Thursday. “But the peso depreciation, while remaining in line with regional peers, has been adding to the build-up of inflationary pressures. This strengthened the case to act – and to act decisively.”

The peso will likely end the first quarter of 2023 at 59.2 per dollar, according to the median forecast in a Bloomberg survey.

“The trend of the peso remains tenuous with downside risks that could emanate from Federal Reserve hikes and dollar strength,” said Robert Dan Roces, chief economist at Security Bank Corp. in Manila.

–With assistance from Ditas Lopez.

(Adds comment from strategist in fourth paragraph.)