USD/PHP Eyes Reversal as Crude Oil Revives 2018 Peso Selloff Fears

USD/PHP, Crude Oil, Iran Sanction Waivers Talking Points

• Philippine Peso weakens as crude oil prices rise on Iran supply disruption concerns

• Higher oil may fuel excess Philippine inflationary fears, reigniting 2018 PHP selloff

• USD/PHP climbed above critical resistance, opening the door to further gains ahead

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The largest rise in crude oil prices since the beginning of April triggered a bout of risk aversion during the early phase of the week, and the Philippine Peso is under pressure. On Monday, US Secretary of State Mike Pompeo confirmed that the nation is planning on ending Iran sanction waivers on imports of the commodity, increasing supply disruption concerns.

This poses a risk for USD/PHP for a couple of reasons. On the chart below, Philippine CPI tends to have a close relationship to crude oil. The commodity is a key import for the Philippines and fears of higher prices could reinstate strong inflationary pressures which triggered a PHP selloff last year. CPI recently came off from its highest point since 2009 to a more manageable 3.3% y/y in March, within the central banks target.

Philippine Economy, Peso Sensitivity to Crude Oil

In fact, the cooldown in oil towards the end of 2018 helped stem depreciation in the Peso as inflation slowed and local front-end government bond yields aimed lower. The latter is a sign of decreasing risk of holding Philippine government debt. Since then, the commodity has rebounded and if it continues doing so, we might see Philippine CPI follow suit. This comes as the Philippine central bank ponders potential rate cuts.

Keep a close eye on US energy earnings this week as well as the nations trade negotiations with Japan. Weakening global growth forecasts might be reflected from companies such as Chevron in their outlook. Meanwhile, sentiment may be at risk due to diverging EU-US foreign policy given the aforementioned developments on Iranian sanction waivers which may increase the odds of a transatlantic trade war.

USD/PHP Technical Analysis

On the daily chart, USD/PHP rose 0.62% in its best single-day performance in over a month. This highlights the pairs sensitivity to unexpected surges in crude oil. Support held above 51.59 (May 2018 lows) as PHP broke above a descending trend line from the middle of March.

This opened the door to further Peso weakness given confirmation. Keep a close eye on what may be support-turned-resistance at 52.12. For more updates on the Philippine Peso and ASEAN currencies, you may follow me on Twitter here at @ddubrovskyFX.

USD/PHP Daily Chart