The USD/PHP exchange rate has suffered a harsh reversal in the past few weeks, helped by the deteriorating greenback. The pair, which peaked at 58.91 in July, has retreated by 4.30% to 56.50 and is hovering near the lowest point since April 4.
Philippine inflation retreats
The Philippine peso reacted mildly to the latest inflation report from the country. In a statement, the statistics agency said that the country’s Consumer Price Index (CPI) retreated from 4.4% in July to 3.3% in August, the lowest level since February. The CPI retreated from 0.7% on a month-on-month basis to 0.1%.
The inflation rate has slowed significantly after peaking at 8.7% in 2023 and analysts expect that the trend will continue in the coming months. The central bank expects that the headline inflation will average 3.1% in 2023 and 2024.
These numbers will likely push the central bank to continue with its interest rate cuts, which it started last month. In August, the bank decided to cut rates by 0.25%, bringing the benchmark to 6.25%. It had remained at 6.50% for seven consecutive months, leading to higher borrowing costs among consumers.
Most recently, data has shown that the Philippine economy is doing modestly well. The economy expanded by 6.3% in the second quarter, the fastest growth pace since 2023 and better than the median estimate of 6.2%. Rate cuts will likely accelerate this recovery path.
Analysts expect the Bangko Sentral ng Pilipinas will deliver at least two more rate cuts this year and several more in 2025.
Other central banks in the emerging markets have either started or are considering cutting interest rates. In China, the People’s Bank of China (PBoC) has left interest rates low as the economy slows. Similarly, the Brazilian central bank has been the most aggressive as it slashed rates from 13.75% in 2023 to 10.50%.
Focus on the Federal Reserve
The USD/PHP exchange rate has also retreated because of the US dollar weakness as signs that the Federal Reserve will cut interest rates this month. The US dollar index (DXY), which tracks the greenback against a basket of currencies, retreated from the year-to-date high of $106.5 to around $100.
Hopes of a jumbo rate cut continued this week after the US published a series of weak economic numbers. In a report on Tuesday, the Institute of Supply Management (ISM) noted that the manufacturing PMI retreated to 47 in August.
Another report by S&P Global showed that the figure remained below 50. A PMI figure of below 50 is a sign that a sector is contracting.
The labor market is not doing well either. According to the Bureau of Labor Statistics (BLS), the number of job vacancies retreated to 7.67 million in July from 7.91 million in June. These numbers were much lower than the expected increase of 8.09 million.
Therefore, the swap market is expecting the Fed to cut rates by 0.50% in its meeting this month. This view will be confirmed when the ADP publishes the latest private payroll data on Thursday and when the BLS releases the official report on Friday.
Analysts expect the ADP report to show that the private sector added over 143k jobs in August, an increase from the 122k it added in the previous month. Another report is expected to show that the initial jobless claims rose by 229k last week.
The official jobs numbers are expected to show that NFP increased from 114k in July to 164k in August while the unemployment rate slipped to 4.2% from the previous 4.3%.
A weak report will raise the risk of a hard landing and force the Fed to slash interest rates by 0.50% to 5.0% in the next meeting.
USD/PHP technical analysis
The daily chart shows that the USD to PHP exchange rate peaked at 59.21 in 2022 and then retreated to 53.63 in 2023. It then bounced back and reached a high of 58.91 in July, close to its highest point in over 50 years.
Most recently, the pair has retreated mostly because of the US dollar weakness. Other Asian currencies like the South Korean won and the Japanese yen have also rebounded,
The pair has remained above the ascending trendline, which connects the lowest swings since February 2023. It has struggled to move below that trendline three times since then.
The USD/PHP exchange rate is also about to form a death cross, which happens when the 200-day and 50-day Exponential Moving Averages (EMA) cross each other. It has also fallen below the key support level at 57.13, its highest swing in September.
Therefore, the pair will likely continue falling as long as sellers push it below the ascending trendline. If this happens, it will retest the key point at 55.
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