...strong currency

Philippine peso among top currency picks in '11

Manila (Philippine Daily Inquirer/ANN) - American investment bank Merrill Lynch has picked the Philippine peso as among its two currency favorites this 2011, saying the local currency was undervalued by about 10-15 percent given the strength of the country's external surplus.

Visiting Merrill Lynch foreign-exchange strategist Ashok Bhundia told reporters Monday (January 10) that the peso and the Singapore dollar were among his firm's top currency picks for this year.

"The peso, we believe, is mainly being supported by remittance inflows, which remain very s
trong. The growth dynamics is getting structural boost from a reform-minded government and if expectations prove right, we should see the fiscal position improve structurally," Bhundia said.

Based on a statistical model used by Merrill Lynch in estimating the sustainable level of current account, Bhundia said the country's surplus was "a little too large." As such, he said the local currency would need to appreciate to attain an equilibrium, thereby explaining the perceived undervaluation of the peso.

However, he said external jitters would likely bring the local currency under pressure in the second quarter. In particular, risk aversion from the lingering fiscal crisis in Europe is seen bringing the local currency to 43.50 against the US dollar by June from around 42:$1 by March this year.

But the currency upswing is seen resuming in the second half, bringing the peso to 42 by September and further to 40 against the greenback by end-2011.

Another factor that would underpin the strength of the peso and other Asian currencies, he added, would be the likelihood that China would allow the renminbi to appreciate.

The Philippines is also seen as among the few countries where the risk of resorting to capital controls was very low given recent pronouncements from the Central Bank (BSP) rejecting such an idea.

What the BSP had instead done, Bhundia said, was to stop rolling over maturing foreign-exchange currency swaps, which had the effect of squeezing peso liquidity by shutting down onshore borrowing rates in peso. But he said this was a very "technical" response that could not likely be sustained going forward.

"We don't think central banks will lean against appreciation. What they will lean against is too rapid appreciation," he said.