A new wave of risk aversion hitting emerging markets since last month may bring the Philippine peso to the 50-per-dollar level by the end of the first quarter of this year, sooner than some analysts think, according to DBS Bank.
The peso has so far fallen about 1 percent this year and on Monday hit a 13-week low of 48.40 before regaining some ground to close at 48.02.
Traders said the dollar was hit in Asian trading by a report in the Wall Street Journal that Citigroup Inc. was in talks with federal officials that could result in the US government substantially expanding its ownership to up to 40 percent of the struggling bank. But traders doubt whether investor appetite for risks would continue rising.
“The risk aversion that we have seen recently is different from the one experienced in September/October,” DBS said in a note on Monday. “This risk aversion we’re experiencing is not simply a bad US story spilling over into the rest of the world.”
Southeast Asia’s biggest lender has downgraded its medium-term outlook for Asian exchange rates to reflect the new risks that have emerged. “This time around, it is the rest of the world that is taking center stage, with the worries spreading from financial stress to economic recessions to sovereign risks,” it said.
DBS said a grim report issued last week by Moody’s Investors Service about prospects for the economies and banking systems in Eastern Europe “effectively made Eastern Europe too large a risk to ignore, not just to Western Europe but also to emerging markets worldwide.”
Moody’s has warned of a “continuous downward pressure” on bank ratings in Eastern Europe.
“The timing of the report couldn’t be any worse. With the Dow Jones breaking its November low, the fragile sentiment in stock markets worldwide will weigh on emerging economies,” DBS said.
In Asia, the bank said the most vulnerable economies will be those with weak international liquidity positions and whose exports earnings are falling. A strong dollar is putting pressure on the external debts of these economies, it said.
“While we believe that the ballooning US budget deficit will come back to haunt the dollar some day, this story will have to wait and give way to the more imminent risks in Europe and emerging markets for now,” DBS said.
The bank now sees higher consolidation ranges for the dollar against Asian currencies, which it said reflects the volatility from these new risks in emerging markets.
Traders at another Singapore-based institution, United Overseas Bank (UOB), said they expected investors to remain risk-averse.
“With no new growth drivers for Asian currencies in the short term and risk aversion taking hold, we expect to see persistent weakening in the currencies,” UOB said in a note.
“It does not help that this being a data-heavy week for Asia, negative economic indicators expected to be announced will also put pressure on the currencies,” the bank said.