Peso closes at P58.62 on Tuesday

MANILA - The Philippine peso may breach the P60 per US dollar level if the protectionist policies promised by incoming US President Donald Trump take markets by surprise, a unit of Fitch Solutions said on Tuesday.

BMI said the Bangko Sentral ng Pilipinas will also need to intervene more in the foreign exchange market in the coming months to support the peso.  

The peso closed at P58.62 to the US dollar at the end of Tuesday's trading, which was marginally higher than its previous close of P58.7 on Monday.

However, Tuesday's close was still weaker compared to how the peso performed at the start of the trading year on Jan. 2 when it ended at P57.91.

BMI said breaching the P60-to-the-dollar level remains a very real possibility depending on how Trump’s policies.

"If the newly elected president opts for very aggressive protectionism policies that take markets by surprise, the dollar could reach another all time high," BMI said.

The Fitch unit said that if this happens, BSP intervention in the forex market will prove ineffective. BMI said it sees the peso trading within the range of P55.20 to P59.20 over the course of this year.

"For sure, the peso would have traded weaker had the BSP not stepped in to arrest its decline," BMI said.

While BSP Governor Eli Remolona had earlier downplayed suggestions that the central bank was supporting the peso, BMI said the recent decline in foreign reserves confirms its view that the BSP was actively supporting the local currency.

Remolona has said that the peso's depreciation versus the dollar was not due to the local currency's weakeness but rather the US currency's strength as the dollar has appreciated against other currencies.

BMI said the BSP will need to be even more active in intervening in the forex market as US interest rate changes continue to add volatility to the peso. Part of this is also due to incoming President Donald Trump's statements about tariffs.

"There is not much clarity on newly elected President Trump’s protectionist policies as of now. He has promised to implement 10-20 percent blanket tariffs on all goods entering the US. And this has triggered the Fed to adopt a more hawkish stance in response. Similarly, market participants have priced in fewer cuts in 2025, which explains the recent bout of dollar strength," BMI said.

Until more details about Trump's policies are revealed, markets will speculate on his every move, BMI said.

Also seen to weigh down the currency will be the rate cuts that are expected to be implemented by the BSP in the first half of the year, which will widen the interest rate differential between the US and the Philippines.

"We are projecting 75bps and 100bps respectively. But with the economy in need of support, policymakers will likely implement the bulk of cuts in H1 even as the Fed does so in H2. This means interest rate differentials will widen slightly in favour of the US," BMI said.

The BSP cut rates by 75 basis points last year amid easing inflation. Remolona has said that more cuts can be expected this year, but the cumulative 100bps cuts for 2025 now seem less likely.