CEBU, Philippines - The peso could strengthen to the 30-level against the dollar next year as investors continue to flood emerging markets regardless of the outcome of the US elections on Tuesday, an investment bank said.
In its latest research note, Bank of America-Merrill Lynch (BofA) said it expects the peso to average 41 to a dollar by the first quarter of 2013, before appreciating further to 39.80 for the rest of the year.
BofA’s forecasts are stronger than the government’s official assumption of 42-45 next year. The peso closed at 41.18 on Wednesday, the last trading day before the holidays.
A strong peso, while making imports cheaper, also makes export products expensive abroad, possibly denting demand. It also trims the value of remittances from overseas Filipinos.
“In our view, there is still further upside to EMFX (emerging market foreign exchange) in the near term. PMI data has been decent for September following the US Fed meeting, and we think investors will continue to push currencies higher as they await further confirmation of improved activity,” BofA explained.
The US, considered as investors’ safe haven, has been struggling to boost growth four years after the global financial crisis. Its central bank, the US Federal Reserve, said on September it is embarking on a third round of bond-buying program meant to flood the economy with cash to boost demand and growth.
The Fed announcement came after US manufacturing activity hit 51.5 in the purchasing managers’ index (PMI) in September, similar from August. A reading above 50 indicates expansion.
A strong US manufacturing performance signals economic recovery for the world superpower and thus, should drive investors to invest in risky assets such as the peso.
The outcome of the US elections will also only have “neutral” effect to emerging market currencies like the peso, which BofA expects to trade at an average of 42 this quarter.
“Market pricing of an Obama victory is mild USD (US dollar) negative. (Mitt) Romney victory, USD positive,” it said.
This indicated that the market may view a re-election of US President Barack Obama positively, giving them confidence to acquire risky assets and thus lowering the dollar’s value. In contrast, a Romney victory is predicted to drive investors to safe havens like the dollar, contributing to its appreciation.
“Both a Romney win and Great Rotation pose upside risks to US rates. Historical evidence suggests this would be bearish for EM rates but neutral for EMFX overall – though with significant differentiation within it,” BofA said.
In an effort to tame the peso’s appreciation, the Bangko Sentral ng Pilipinas (BSP) slashed its policy rates by another 25 basis points last Oct. 25, bringing them to new record-lows of 3.5 percent and 5.5 percent for overnight borrowing and lending, respectively.
BSP Governor Amando Tetangco Jr. said last Monday the central bank is looking at using its macroprudential measures to manage capital flows which drive the peso to strengthen. These measures include tweaking the bank reserve requirements, real estate exposure ceilings and single borrower’s limit, among others.