Philippine peso turnaround hangs on inflation data

Peso bulls and Philippine bond investors wagering on tamer inflation after this year’s run up are set to find out just how successful government efforts to keep consumer prices in check have been.The nation’s inflation rate has surged since the end of 2017, touching an almost decade high of 6.7% in September and October as food and fuel costs spiked. But a combination of aggressive monetary-policy tightening, a global oil rout and the prospect of fresh legislation to ease rice import restrictions has the country’s central bank predicting that price pressures are poised to moderate.Bond and currency traders appear to agree. The peso has gained about 3% quarter-to-date, tops in Asia save for the rupee and rupiah, while benchmark 10-year yields have fallen over a full percentage point since peaking late last month. It makes November’s consumer price index report, due on December 5, a must-watch event for market participants hoping their faith in the Philippines’ inflation-fighting efforts hasn’t been misplaced.Just last week Bangko Sentral ng Pilipinas’ department of economic research said it expects inflation to range from 5.8% to 6.6% in November as cheaper fuel and rice costs outweigh higher bus fares and electricity rates. Days earlier, Bruce Tolentino, a member of the BSP’s policy-making board, said price pressures have “significantly subsided for now.”The optimistic outlooks follow the central bank’s November 15 decision to pare its 2019 inflation forecast to 3.5% – within the BSP’s 2 to 4% target range – from 4.3% previously, even amid a surge in domestic spending meant to shield the economy from a deteriorating global trade environment.The downward revision came on the same day policy makers opted to hike interest rates for a fifth time since May, totalling 175 basis points of tightening. Officials’ efforts have largely been rewarded by investors, who’ve bid the peso back down to 52.45 per US dollar, from a 13 year high of 54.41 last month. The country’s 10-year yield has slid to 7.04%, versus 8.32% just over a month ago.Of course, signs the Federal Reserve is poised to slow its policy-tightening trajectory also help. Chairman Jerome Powell Wednesday signalled the central bank is becoming less wedded to its current quarterly rate-hiking path, sending a JPMorgan Chase & Co gauge of emerging-market currencies to its biggest rally in four weeks.Still, the fact that technicals aren’t in the peso’s corner may be a reason for caution. Slow stochastics, a momentum indicator, remain close to overbought territory, signalling near-term risks are skewed toward a move to the currency’s 200-day moving average near 52.92. Should tomorrow’s CPI print come in above the consensus 6.3% estimate, it would likely confirm the trend.A higher-than-expected print would also keep alive the possibility of another BSP rate hike in the coming months, to the detriment of bond bulls. Deputy governor Diwa Guinigundo said November 26 that it remains too early for the central bank to take any of its policy options off the table, and that officials remain ready to adjust monetary conditions to ensure inflation expectations are well-anchored.Tomorrow’s CPI report will go a long way to determining just how close at hand officials will need to keep their policy tools.