US Federal Reserve (Fed) rate cuts and the Bangko Sentral ng Pilipinas' (BSP) dropping plans for a preemptive easing could lead to the Philippine peso rebounding to P56.60 at the end of this year, a Fitch Group unit said.
"Constant repricing of interest rate expectations in the US has led to much volatility in many emerging market currencies, and the peso is no exception," BMI Country Risk & Industry Research noted in a July 3 report.
"We think that the currency will reverse its losses in the fourth quarter once the US Federal Reserve begins its monetary loosening cycle in September," it added.
The peso has been trading in the P58:$1 level for more than a month after Bangko Sentral ng Pilipinas (BSP) Governor Eli Remolona Jr. indicated that an easing could start in August, which would make Philippine assets less attractive.
BMI said it believes that the BSP was unlikely to do so as a "preemptive move to cut ahead of the Fed will exacerbate weakness in the already battered currency."
"Instead, we think that the bank will only adjust monetary settings in concert with the Fed, with the first cut only materializing in October," BMI said.
"If we are right, we could very well see the peso regain some of its footing against the greenback as market expectations reverse course," it added.
BMI said that the central bank would continue to intervene to prevent the peso from depreciating past the record P59:$1 level hit in October 2022 when the BSP failed to match aggressive monetary tightening by the Fed.
The central bank's benchmark rate currently stands at 6.5 percent, the highest since 2007, after rate hikes totaling 450 basis points.
BMI said that it expects the Fed to start easing in September, leading cuts totaling 50 basis points by the end of 2024.
"Until then, constant fluctuations in market rate expectations will inject another layer of unpredictability into dollar strength, indirectly affecting the peso," it said.
BMI, which retained its 2024 peso forecast despite the recent volatility, said it revised that for 2025 to a slight strengthening — P55:$1 by year-end — from the previous projection of a weakening.
"Even so, the bigger picture is that weak fundamentals will keep a lid on any appreciatory pressures on the currency," it added.
The main risks to the peso-dollar forecast, BMI said, involve the timing of the BSP's rate cuts.
"If the bank were to go ahead with monetary loosening in August, this would exacerbate weakness in the peso, potentially breaching the P59.00/USD level," it added.
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