Philippine Peso May Gain on CPI as USD Eyes Jobs data, Brexit News

ASEAN WEEKLY OUTLOOK – PHILIPPINE CPI, INDONESIAN CPI, USD/PHP, USD/IDR, BREXIT NEWS

• Philippine Peso appreciated despite USD gains as BSP took aggressive approach on rates
• This week, USD/PHP and USD/IDR await respective domestic CPI data for next direction
• The US Dollar looks to local wage growth, jobs data and latest Brexit news from PM May

Most Southeastern Asian currencies such as the Indonesian Rupiah succumbed to selling pressure as the Fed raised interest rates as expected to a range of 2.00 – 2.25 percent. However, losses started accelerating afterwards as Italian budget concerns fueled a selloff in the Euro which consequentially uplifted the US Dollar heading into the end of last week. SGD brushed off softer-than-expected local CPI data.

USD/IDR rose 0.58 percent which was its largest gain in a week since mid-August despite the Bank of Indonesia raising benchmark interest rates to 5.75% from 5.50% as expected. The markets may have been anticipating bolder forward guidance but the central bank mostly reiterated the status quo and maintained their hawkish monetary policy stance. Expect more efforts for them to guard the Rupiah as per the usual.

Meanwhile one notable standout last week was the Philippine Peso which managed to appreciate against the US Dollar. Bangko Sentral ng Pilipinas, much like Indonesia, also raised interest rates but by a more aggressive 50 basis points from 4.00% to 4.50%. As expected, this central bank took a more hawkish approach compared to the Bank of Indonesia which brings us to what is in store for these currencies ahead.

Below is a chart comparing USD/PHP to Philippine inflation rates and it helps to show why the central bank perhaps took a bolder approach. Philippine CPI is due this week and inflation is expected to clock in at 6.8% y/y in September which is the fastest pace of price growth since February 2009. High oil and rice prices, coupled alongside the depreciating Philippine Peso, have helped contribute to this.

As a result, the BSP said that a tighter stance will put CPI back to target over the medium term and that it is ready to take further policy action if necessary. Do note that they see inflation peaking in Q3 as it returns to 4.3% in 2019. Should the nation still face rising inflation pressures, we may see the central bank taking a more aggressive stance which may bolster the Philippine Peso which is showing signs of appreciating versus USD.

Meanwhile, looking at the chart below might explain the less aggressive policy approach from the Bank of Indonesia. Despite the remarkable depreciation in IDR prices, both headline and core inflation rates have remained largely subdued in Indonesia. We shall find out next week if this remains true because we will also get the nation’s inflation report.

Economists are predicting that the headline CPI rate will fall to 3.06% y/y in September form 3.20% in August. Not only will this reduce the urgency to keep on raising rates, but also inflation will still be comfortably within the central bank’s 2018 target (3.5 +- 1%). Thus if the US Dollar continues its appreciation course, the Indonesian Rupiah may face further weakness.

But do keep in mind that both of these central banks are fighting to support their currencies which means losses could be limited. In regards to this aspect, next week we will receive the latest foreign exchange reserves from Indonesia and the Philippines. This will show us how intensely these central banks are taking it into their own hands to curb depreciation. Not long ago, Indonesian FX reserves fell to their lowest since January 2017.

Finally, keep an eye on how the US Dollar behaves next week on both economic and political event risk. The currency faces the US jobs report where average hourly earnings will be closely eyed. As for the latter, the latest Brexit newsmomentarily uplifted the British Pound earlier last week which weighed against USD. Expect more volatility in GBP prices as UK PM Theresa May faces her Conservative Party at their annual conference.



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