Morgan Stanley Is `Modestly Bullish' on Peso, Rupiah

By Lilian Karunungan

July 23 (Bloomberg) -- Morgan Stanley said it has turned ``modestly bullish'' on the Philippine peso and the Indonesia rupiah after their central banks raised interest rates in the past months to damp inflation.

The Philippine peso is headed for its first monthly gain since February after the Bangko Sentral ng Pilipinas raised its overnight rate after inflation accelerated to the fastest in 14 years. Indonesia's rupiah has risen 1.3 percent in the past month, the second-best performer of the 10 Asian currencies outside Japan, after Bank Indonesia increased borrowing costs to slow the quickest inflation in 21 months.

``With monetary policy `normalizing', the balance of fundamentals is tilting back to a more supportive position for the Philippine peso and the Indonesian rupiah,'' Stewart Newnham, a research analyst in Hong Kong at Morgan Stanley, wrote in a research note sent to clients today. He confirmed the contents of the report by telephone.

The Philippine central bank on July 17 raised its overnight rate to 5.75 percent from 5 percent in June after inflation quickened to 11.4 percent last month.

Bank Indonesia on July 3 increased its benchmark rate to 8.75 percent from 8 percent starting May to slow inflation. Bank Indonesia's Governor Boediono said today fighting inflation will be the central bank's priority for the next 1 1/2 years.

`Weak' Response

The peso rose 1.3 percent to 44.02 against the U.S. currency as of the 4 p.m. close in Manila, the most in almost seven years, according to the Bankers Association of the Philippines. The rupiah gained 0.1 percent to 9,145 per dollar.

``We believe the weak monetary policy response to inflation has been the Achilles' heel that has undermined the overall fundamentals of their currencies,'' Newnham said in the report.

Morgan Stanley, the second-biggest U.S. securities firm by market value, didn't give a new forecast for the peso. The company on July 7 had predicted the Philippine currency will decline to 45.80 by Dec. 31.

The rupiah's gains will be capped at 9,000, the strongest since June 2007, the Morgan Stanley report said, without giving a time frame. It had previously forecast the currency to decline to 9,367 by the end of December.

Morgan Stanley said its ``bullishness'' on both currencies is tempered by the prospects of a slowdown in the global economy.

The peso's depreciation will slow after the central bank's rate increase of 50 basis points last week, according to a report by HSBC Holdings Plc.

`Moderate Pace'

``Peso weakness will likely occur at a more moderate pace going forward,'' Perry Kojodjojo, HSBC's Hong Kong-based currency strategist, said in a report sent to clients today. ``Hawkish subsequent talk suggests the most linear part of the U.S. dollar rally is done.''

Kojodjojo, who confirmed the contents of his report, said he did not have a new forecast. In a June 23 report he said the peso may weaken to 49 per dollar by December and to 52 by the second quarter next year,

The Philippines' rate advantage over the U.S. is 3.75 percentage points, the most since 2005. Indonesia's rate premium to the U.S. is 6.75 percentage points, the biggest since 2006.

To contact the reporter on this story: Lilian Karunungan in Singapore at at lkarunungan@bloomberg.net