Peso will appreciate against the dollar till May 2010
Posted by butalidnl on 3 October 2009
The peso is set to appreciate significantly against the US dollar in the next few months. In August, it was hovering almost around Php 49: 1 US$; but slowly, it has gained strength to its present 47.50: 1. But this is just the beginning, the peso will steadily climb in value from now till at least May 2010.
The recent disaster that struck Manila will cause an increase in inward remittances in the coming weeks, as Overseas Filipinos send money to their relatives who were affected by the flood. And this will be on top of the remittances that are set to come in to pay for school expenses – final exams are coming, and then this will be followed by tuition fees, etc. By the time this wave of remittances are over, there will then be the Christmas surge in remittances.
This surge of remittances is likely to cause the peso to strengthen against the dollar. The school and Christmas surges were expected, but the “Ondoy” relief remittance surge will be an additional factor to strengthen the peso. And in addition, we could expect the national elections in May 2010 to further increase the inflow of money from abroad. This happens every time there is an election, especially during national elections. It seems that money kept abroad by politicians, and by businesses, is tapped for campaign expenses.
The US dollar is getting weaker. It has weakened against most major currencies, and this is likely to worsen by the end of the year. In addition to the overall lowering of confidence in the dollar, we need to factor in the actions of Central Banks throughout the world. They are likely to lower the percentage of dollars they keep as foreign exchange reserves by the start of 2010. It is but proper that they do so, with the decreased trade with the US and the expectation that the US dollar will weaken.
If the dollar decreases in value against major currencies, it will also decrease in value against the peso. One factor is the exchange rate effect on remittances – OFs outside the US will remit the same amount in their own currency, but this will result in more dollars/pesos received by their beneficiaries. Similar mechanisms affect trade, investments, and other monetary flows.
The recent disaster will result in a lot of Filipinos drawing down their savings. At the same time, insurance companies need to liquidate a big part of their reserves in order to be able to pay all those who incurred damages during the flood. All these withdrawals of money will tighten the supply of money, and increase interest rates on loans, bonds, money market placements etc. International money managers will take note of this, and bring their funds into the country to take advantage of the widened interest rate differential. We would note this as an increase in “portfolio investments” by foreigners. This will add to the already increased net inflow of money into the country, and the resulting appreciation of the peso.
All these will mean a significant strengthening of the peso vis-a-vis the dollar, at least in the period till May 2010. What happens later will depend on the state of the world economy and the Philippine economy by then.