The Philippine peso could test a new record low against the US dollar this week, as elevated global oil prices and the hawkish policy stance of the US Federal Reserve continue to weigh on the local currency, according to a weekly market report from Union Bank of the Philippines (UnionBank).

In its MktsFocUs report for the week, UnionBank analysts said the peso may trade within a range of P62.50 to P63.20 against the greenback. Should the upper end of that range materialize, the local unit would breach the P63-per-dollar handle for the first time in history.

"The 63.00 psychological level remains key near-term resistance; a sustained break higher could pave the way for fresh record highs, while dovish Fed repricing or BSP (Bangko Sentral ng Pilipinas) intervention could pull the pair back toward the 62.30-62.50 support zone," UnionBank said.

Fed Tightening and Safe-Haven Demand

Last week, the Federal Reserve raised interest rates for the first time in three years after holding fire for five straight meetings, delivering a 25-basis-point (bp) hike that lifted its policy rate to the 3.75%-4% range. Markets are pricing in further increases from the US central bank this year, with Fed Chair Kevin Warsh acknowledging the need for monetary policy tightening as the United States continues to grapple with sticky inflation.

Safe-haven demand for the dollar, driven by continued uncertainty over the Middle East war, which has also stoked renewed inflation concerns, has dragged the peso to new lows against the greenback. From trading at the P58-59 level before the conflict, the peso is now moving in the P62 range. On Sept. 14, it logged a new record-low close of P62.86, and on Sept. 15 it touched a historic intraday trough of P62.925.

BSP Stance on the Exchange Rate

In August, Bangko Sentral ng Pilipinas Governor Eli M. Remolona, Jr. said a return to the P60-per-dollar level may not be possible in the near term, describing the Philippines' exchange rate problem as "very hard to fix" due to the country's weak exports and its status as a net importer. He said attempting to defend the peso aggressively would only burn through the country's dollar reserves.

Mr. Remolona has also said the central bank maintains a constant presence in the foreign exchange market, but only to smooth out sharp swings that could become inflationary. That approach leaves the peso's near-term path dependent on both global dollar conditions and the domestic inflation outlook, rather than on a fixed exchange-rate target.

Structural Headwinds and Imported Inflation

According to UnionBank, the peso remains vulnerable to structural pressures, and its impact on imported inflation could give the central bank reason to raise rates further.

"The peso continues to face structural headwinds," the bank said. "Elevated Brent crude above $108/bbl (per barrel) is likely to widen the current account deficit and weigh on dollar reserves, while the BSP, after raising its target RRP (reverse repurchase) rate to 5% in August, may face pressure to tighten further if peso weakness accelerates amid another local inflation surge."

The exchange-rate outlook therefore also puts the BSP's remaining policy meetings in focus. Officials will be weighing the need to contain inflation against the effects of additional monetary tightening as the peso faces pressure from oil prices and global interest rates.

Revised Peso Forecasts

UnionBank said it now expects the peso to end this year at P62.30 against the dollar, weaker than its earlier projection of P61. For 2027, the bank expects a slight recovery to P61.52, though that estimate is also weaker than its previous forecast of P60.

The BSP has been in a tightening cycle since April, delivering a total of 75 bps in rate increases to bring its key policy rate to an over-one-year high of 5%. Mr. Remolona has kept further hikes on the table to ensure inflation eases back to the bank's 3% target, as the headline figure has stayed above that level for the past six months.

The Monetary Board is scheduled to hold its final two rate-setting meetings of the year on Oct. 22 and Dec. 17.
— Katherine K. Chan, BusinessWorld