(Bloomberg) -- The Philippine central bank has spared no expense in preventing the peso weakening past the crucial 57 per dollar level. It may all be for nothing as rising oil prices and the prospect of hefty interest-rate cuts threaten to bludgeon the currency.

The peso has fallen about 1% this year to close at 56.02 to the greenback Monday. That leaves it within striking distance of the level at which Bangko Sentral ng Pilipinas intervened last year to stop the currency from falling further.

The peso has been undermined by dovish comments last month from Philippine Finance Secretary Benjamin Diokno, who said the central bank can cut rates by as much as 100 basis points in 2024, and also by the nation’s ongoing trade deficit. 

Adding to those headwinds is the Federal Reserve, which is pushing back against market expectations for rate cuts starting as soon as March. Escalating tensions in the Middle East may end up being the catalyst that finally pushes the peso past its support level in coming weeks. 

“Extreme geopolitical and oil tail risks could arguably induce stress in the order of a 2%-to-4% PHP drop,” said Vishnu Varathan, Asia ex-Japan economist at Mizuho Bank Ltd. in Singapore. “Although we think there will be much resistance heading into, and gaining traction above, 57.” The currency may possibly weaken to 58, he said.

Investors will be watching to see if the BSP releases any commentary on the peso’s level at its policy meeting Thursday, when the central bank is forecast to keep its overnight borrowing rate at 6.50%. 

‘Upside Risks’

“The BSP may reference the peso, to the extent that FX weakness fuels imported inflation,” says Nicholas Chia, a macro strategist at Standard Chartered Bank SG Ltd. “Despite the moderation in January inflation, the BSP remains cognizant of upside risks to inflation and to ensure inflation expectations are well-anchored.”

A seasonal decline in overseas remittances isn’t going to help. Historically, flows of money into the Philippines increase toward year-end as Christmas approaches, but then slow in the first few months of the year.   

Still, Standard Chartered’s Chia still thinks the peso may manage to hold above the support level in the near-term. 

“I don’t think USD/PHP will re-test the 57 level soon because US yields are unlikely to return to the cycle-highs, barring a sharp re-acceleration in US growth,” he said. The level of 56.50 is the key one to watch in the near-term — if that is breached, then a test of 57 becomes very likely, he added. 

Here are the key Asian economic data this week:

  • Tuesday, Feb. 13: Australia business confidence, New Zealand 2-year inflation expectations, Thailand consumer confidence
  • Wednesday, Feb. 14: New Zealand card spending
  • Thursday, Feb. 15: Philippines rate decision, overseas remittances, Japan GDP, Australia employment, household spending, Indonesia trade balance
  • Friday, Feb. 16: RBNZ Governor Orr speaks, New Zealand manufacturing PMI, Singapore non-oil domestic exports, Malaysia GDP, BOP current account, South Korea unemployment

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