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Philippine Peso Has Worst Month Since May 2012; Bonds Decline

The Philippine peso had its biggest monthly decline since May 2012 on concern the U.S. will start paring stimulus that has supported emerging markets. Government bonds weakened.

Speculation the Federal Reserve will taper could spur asset re-pricing and cause capital outflows, Bangko Sentral ng Pilipinas Deputy Governor Diwa Guinigundo said in a speech yesterday. The peso should be supported by fundamentals and the BSP will let the exchange rate be market-determined with “scope for official action” to curb volatility, Guinigundo said. The $250 billion economy grew 7.5 percent in the second quarter, beating the 7.2 percent median forecast in a Bloomberg survey.

“The big question is still what the Fed will do next month,” said Alan Cayetano, head of foreign-currency trading at Bank of the Philippine Islands in Manila. “Demand for dollars is also rising as we go into the thick of the imports season. The central bank has been seen in the past few days providing liquidity at the 44.75 level.”

The peso fell 2.7 percent this month and rose 0.3 percent today to 44.605 per dollar at the close of trading in Manila, according to Bankers Association of the Philippines. One-month implied volatility, a measure of expected moves in the exchange rate used to price options, advanced 128 basis points this month to 7.41 percent. The rate slipped eight basis points today.

The yield on the benchmark five-year bond climbed 53 basis points, or 0.53 percentage point, this month and fell two basis points today to 3.48 percent, according to midday fixing prices from the Philippine Dealing & Exchange Corp.

Weakening Peso

The peso will probably weaken to 45.2 to 45.3 in the coming weeks, Cayetano said. The Philippine currency has declined 8 percent this year.

Inflation this month may range between 1.9 percent and 2.7 percent, central bank Governor Amando Tetangco said yesterday, keeping consumer-price gains within the 3 percent to 5 percent target this year. The government will report August inflation data on Sept. 5.

The Philippines doesn’t need to tap any currency swap arrangement at this point as foreign-currency reserves are at comfortable levels, Guinigundo said today, adding that the currency’s pass-through impact on inflation has declined.

The Federal Reserve will probably reduce its $85 billion monthly bond purchases in September, according to 65 percent of economists surveyed by Bloomberg this month. Many Philippine exporters typically boost raw material imports going into the fourth quarter.

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