Philippine Peso Drops Most Since 2010 on Capital Outflow Concern

The Philippine peso dropped the most since 2010 on speculation an improving U.S. economy will prompt the Federal Reserve to scale back asset purchases that have spurred fund flows into emerging markets. Bonds and stocks fell.

The Dollar Index, which tracks the greenback against currencies of six U.S. trading partners, touched the highest in almost three years after Fed Chairman Ben S. Bernanke said yesterday the central bank may taper monthly bond buying if it’s confident of sustained economic gains. Philippine gross domestic product probably expanded close to 6 percent in the first quarter, International Monetary Fund Resident Representative Shanaka Peiris said on May 21.

“A recovering U.S. economy and prospects of the Fed starting to tighten raise the possibility of some of the funds moving out of emerging markets like the Philippines,” said Rolando Avante, president of Philippine Business Bank (PBB) in Manila. “The fundamental strength of the peso, supported by growth prospects and remittances, will keep the exchange rate in a range in the meantime.”

The peso dropped 1 percent to 41.575 per dollar at the noon trading break in Manila, set for its biggest decline since November 2010. The local currency traded at the lowest since Oct. 11. One-month implied volatility, a measure of expected moves in the exchange rate used to price options, rose nine basis points to 4.53 percent.

U.S. retail sales unexpectedly advanced in April and jobless claims dropped to the lowest level since January 2008, according to data released this month.

Bonds, Stocks

The yield on the 8 percent notes due July 2031 rose 10 basis points, or 0.10 percentage point, to 3.82 percent, the highest since May 7, according to Tradition Financial Services. The Philippine Stock Exchange (PCOMP) Index halted two days of gains.

Bangko Sentral ng Pilipinas, in a memo dated May 17 posted on its website this week, banned so-called investment management activities, a type of account handled by trust entities, from the special deposit accounts. The central bank ordered trust entities to reduce their holdings of the accounts by at least 30 percent by end-July and totally phase out by end-November, according to the memo.

Bangko Sentral reduced the interest rate on $45 billion in special accounts three times this year to 2 percent while keeping its benchmark overnight rate at a record low 3.5 percent.

“The central bank’s actions are also geared towards supporting growth by prompting these funds to go back to the banking system and for the banks to lend,” Avante said.

To contact the reporter on this story: Clarissa Batino at cbatino@bloomberg.net

To contact the editor responsible for this story: James Regan at jregan19@bloomberg.net

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