DBS Group Research lifted its year-end 2026 USD/PHP forecast to 62.7 from 57.8, after USD/PHP first traded above 60 a month after Operation Epic Fury coincided with the Strait of Hormuz’s closure. The resulting rise in energy prices and supply disruption has fed through to the Philippines’ external accounts, with the economy’s dependence on imported Gulf oil linked to a return to record trade deficits.
Inflation has accelerated sharply. CPI inflation rose to 7.2% YoY and 2.6% MoM in April, compared with 4.1% YoY and 1.4% MoM in March, prompting the Bangko Sentral ng Pilipinas (BSP) to undo a February 19 25 bps cut with a 25-bps increase to 4.50% on April 23. The BSP’s May inflation view stands at 7.1-7.9%, which remains above its 2-4% target range.
Persistent Peso Weakness and Policy Risks
Given the revised forecast for the peso to hit 62.7, we believe the path of least resistance is further depreciation. In the coming weeks, we will be looking to build long positions in USD/PHP. The underlying pressures from high oil prices and a widening trade deficit are unlikely to ease soon.
The recent May inflation print, coming in at 7.8%, confirms our fears by landing at the upper end of the central bank’s forecast. This persistent price pressure, more than double the official 2-4% target, effectively forces the BSP’s hand. Any hesitation to hike rates further would be seen as a policy failure, likely accelerating the peso’s decline.
Volatility, Growth Constraints, and Diminishing Carry Appeal
We are favoring the use of options to express this bearish view on the peso, as implied volatility has surged. For instance, one-month USD/PHP implied volatility has recently jumped to over 10%, a level not seen since the global shocks of 2022. Buying near-term call options on USD/PHP allows us to capture potential upside while strictly defining our maximum risk in this uncertain environment.
We expect the Bangko Sentral ng Pilipinas to remain behind the curve, constrained by slowing domestic growth. Recent data showed Q1 2026 GDP growth slowed to 4.1%, limiting the central bank’s ability to match the aggressive hiking cycles of 2022. This policy bind, choosing between fighting inflation and supporting a fragile economy, will likely lead to peso underperformance against the dollar.
The appeal of the peso for carry trades is rapidly evaporating despite the recent rate hike. The risk of currency depreciation, which we’ve seen can wipe out months of interest-rate gains in a single week, is now too high for many investors. We are observing an unwinding of these positions, adding another layer of selling pressure on the PHP in the spot market.
