SINGAPORE -- The Philippine peso extended gains on Friday to hit a three-week high after Standard & Poor's raised the country's credit rating to investment grade, but investors stayed cautious over possible steps by the central bank to stem its appreciation.
The peso rose 0.2 percent to 40.950 per dollar, its strongest since April 11. It gave up some of the gains later, standing at 40.97 as of 0238 GMT.
There was a market talk of dollar purchases by the central bank around the session peak, causing investors to take profits, traders in Manila said.
On Thursday, S&P upgraded the Philippines' foreign long-term debt by one notch to BBB minus, and foreign short-term debt to A-3, with a stable outlook, citing the country's strong external profile, moderate inflation and declining reliance on foreign currency debt.
The move, after Fitch Ratings' upgrade to investment grade in late March, is seen attracting more foreign capital flows to the Southeast Asian country.
But Bangko Sentral ng Pilipinas is expected to take more steps such as actual intervention and cutting yields on peso deposits in order to curb the peso's appreciation, traders and analysts said.
"Persistent downward pressure (on dollar/peso) is likely to remain and we suggest shorting the USD/PHP on upticks in the near-term," Maybank said in a note.
"However, we maintain our forecast for the pair at 41.00 by 2Q-13, 40.50 by 3Q-13 and 39.50 by end-2013 as we take into consideration potential 'leaning against the wind' activities by BSP," Maybank added.
Maybank expects the authority to use macro-prudential and liquidity measures to deal with currency volatility, with a forecast of more cuts to rate on a peso short-term deposit scheme.
Hours after the S&P upgrade on Thursday, central bank governor Amando Tetangco said on Thursday the country has no plans to impose controls on portfolio inflows at the moment.
The central bank recently cut the special deposit account (SDA) rate to 2.0 percent across all tenors, bringing to more than 200 basis points the total rate cuts since July 2012.
Last month, it also liberalized rules on foreign currency transactions, allowing residents to invest in property abroad and offshore funds.
Those measures came as the central bank is seen running out of funds for intervention.
With such central bank efforts, the peso has appreciated merely 0.2 percent so far this year.
Still, it is expected to appreciate further despite the authority's stance, some traders said.
"I am sure they will be there as always. But sooner or later the upgrade will force the spot dollar/peso to come down." said a foreign bank trader in Manila.
"I prefer to sell the rallies from hear with target of 40.80 to 40.60," the trader added.