BSP to keep peso from rising fast — Citigroup

The Bangko Sentral ng Pilipinas (BSP)will likely take a more aggressive stance in the foreign exchange market to keep the peso from rising fast against the US dollar, global financial conglomerate Citigroup said in a report Tuesday. “BSP intervention may turn nasty as the peso retraces P43 although line in the sand in the near-term may be P42.50," Citigroup said. According to Citigroup, the combination of trend growth and solid external accounts in a QE2 environment would support a peso appreciation at 40:$1-41:$1 next year. QE2 refers to the second round of quantitative monetary policy easing by the US Federal Reserve that led to the flow of capital funds from the US and Europe to emerging markets like the Philippines with strong macroeconomic environment attractive to profit-starved investments. “Strong peso outlook leads to stable inflationary expectations and with muted fiscal risk, investor appetite for risk assets in the near-term should be sustained, notably the equity market and long bonds," according to Citigroup. The financial conglomerate was referring to the 2010 Philippine deficit pegged at P325 billion. Citigroup believes that “rising [foreign exchange] reserves enhance external funding access." This coupled with strong remittance flows from overseas Filipino workers “would continue to mitigate fiscal weakness." Thus, “Despite the BSP’s recent move to stall the weak US dollar, we think trend growth and strong external accounts amid a QE2 environment enhances peso appreciation to the range of P40 to P41 per dollar next year," Citigroup said. The peso strengthened to 44:$1 in Philippine trading Tuesday, from 44.18:$1 Friday. Philippine markets were closed Monday for a non-working holiday. “Weak US$ outlook would help moor inflationary expectations unless higher oil prices, wage adjustments and demand-pressures spoil the inflation outlook," the financial conglomerate added. The country’s gross international reserves totaled $56.8 billion as of end-October. “Higher reserves enable government unhindered access to external debt funding while the strong peso effects would ease interest payments pressure," Citigroup said. — VS/OMG, GMANews.TV