Peso ₱ rises to ₱ 42-to-dollar level due to rising portfolio investments

The Philippines' Peso ₱ led other Asian currencies in appreciating on Wednesday (July 6 2011), going back to the 42-to-a-dollar level and hitting its strongest finish in nearly two months.

The appreciation of currencies in the region was credited to rising inflows of foreign portfolio investments, which in turn were being driven by expectations that interest rates in emerging economies in Asia would rise further.

Higher interest rates are seen to cause yields of bonds and other portfolio instruments to rise, thereby enticing foreign fund owners.

The local currency closed at ₱42.89 against the US dollar, up by 16.5 centavos from the previous day's close of ₱43.055:$1.

Intraday high hit ₱42.83:$1, while intraday low settled at 43.05:$1. Volume of trade rose beyond the billion-dollar mark to hit $1.102 billion from only $754.59 million previously.

Traders said portfolio yields in the Philippines and its neighbors – including China, India, South Korea, Taiwan, Thailand and Malaysia – have been seen to rise in the months ahead as a consequence of the move of their central banks to hike key policy rates.

In the case of the Philippines, the Bangko Sentral ng Pilipinas has already raised its key policy rates twice this year, the first one by 25 basis points in March and the second by a similar margin in May.

The increase in the key policy rates was meant to influence an increase in the deposit and lending rates of banks. Higher commercial interest rates were meant to temper the increase in consumer prices, as the BSP cited acceleration of inflation to beyond comfortable levels if no intervention is made.

Central banks in the region hope that higher interest rates would encourage people to save and temper their demand for bank loans, thus controlling growth in demand and inflation.

BSP Governor Amando Tetangco Jr. said that besides rising interest rates in emerging Asia, the faster growth of countries in the region vis-a-vis growth of industrialized countries has been attracting foreign fund owners to shift their investments to the former.

"The appreciation is influence by rising [foreign] capital inflows given the gap between emerging markets and industrialized economies," Tetangco said.

Philippines' Peso ₱ Rises to Nine-Week High on Fitch Assessment

The Philippines' peso ₱ climbed to a nine-week high after Fitch Ratings forecast the economy will expand as much as 6 percent this year and next.

The currency rose for a seventh day, its longest winning streak since January, after Fitch said today its outlook on Philippine banks is stable, "underpinned by an improving domestic economy and relatively low asset quality risk." Growth was 4.9 percent in the first quarter, the slowest pace since the final three months of 2009.

"The Fitch comments are validating the improved macro fundamental story that's been making the rounds the past few weeks," said Radhika Rao, an economist at Forecast Pte in Singapore. "For the peso going forward, it's certainly positive."

The peso strengthened 0.4 percent to ₱42.90 per dollar as of the 4 p.m. close in Manila, according to Tullett Prebon Plc. It touched ₱42.825 earlier, the highest level since May 3.

Benchmark five-year bonds gained, pushing yields to the lowest level since January. The rate on the 7 percent notes due January 2016 dropped four basis points, or 0.04 percentage point, to 4.71 percent, according to Tradition Financial Services.

The government started a debt swap yesterday, offering at least ₱100 billion pesos ($2.3 billion) of 10.5- and 20-year bonds in exchange for shorter-dated notes.