Currencies across the region jumped yesterday, following their developing-nation peers in the Americas and Europe, after the US data published Wednesday led to a slump in the dollar. The Thai baht led gains, rising 0.9%, while the Indonesian rupiah strengthened 0.7%.
SINGAPORE: The worst may be over for emerging Asian currencies as slower-than-expected US inflation eases pressure on the Federal Reserve (Fed) to aggressively raise interest rates, according to DBS Group Holdings Ltd and Malayan Banking Bhd
(Maybank).
Currencies across the region jumped yesterday, following their developing-nation peers in the Americas and Europe, after the US data published Wednesday led to a slump in the dollar. The Thai baht led gains, rising 0.9%, while the Indonesian rupiah strengthened 0.7%.
“The US inflation data affirmed our assumption for the dollar to return gains against Asian currencies starting this quarter into the rest of the year,” said Philip Wee, a senior foreign-exchange strategist at DBS in Singapore. “The worst is likely over for Asian currencies, though volatility will persist.”
A weaker dollar will ease pressure on Asian central banks to raise borrowing costs and help support economic growth in the region amid the risk of a recession in the United States and other developed nations.
Optimism toward emerging Asian assets has already been building in recent months as shown by fund inflows. This month alone, global investors have bought a net US$2.06bil (RM9.2bil) of Indian stocks and US$1.25bil (RM5.6bil) of South Korean equities, along with US$1.71bil (RM7.6bil) of South Korean bonds and US$721mil (RM3.2bil) of Indonesian debt.
JPMorgan Asset Management shifted to an overweight position on Indonesian bonds this month, saying any selloff would be a good opportunity to buy duration.
Annual US consumer-price gains slowed to 8.5% in July from a 9.1% June advance that was the largest in four decades, the Labour Department said Wednesday.
“Our baseline has always been for US inflation to grind lower over time, and for growth jitters to become more apparent at year-end,” said Yanxi Tan, a currency strategist at Maybank in Singapore. “That would support some retracement of the dollar’s strength against Asian foreign exchange in the second half of the year.”
Swaps referencing the Fed’s September meeting swung back toward a half-point rate increase after earlier pricing in a larger move.
“Bets on a 75 basis-point hike may be unwound, and the euro, the won and commodity currencies will get a boost as risk sentiment improves,” Kim Seunghyuk, a foreign-exchange analyst at NH Futures in Seoul, wrote in a research note.
Still, there are those who remain bearish on Asian currencies, saying last week’s better-than-forecast payroll figures are a reason for the Fed to keep raising interest rates.
“We are not chasing this dollar and Asia lower move,” said Trang Thuy Le, an Asia foreign-exchange strategist at Macquarie Capital Ltd in Hong Kong. “We don’t think one consumer price index (CPI) report is enough to change the Fed rhetoric. Between payrolls and CPI, we throw our weight behind the strong payroll numbers.”
Emerging Asia currencies are still nursing heavy losses this year. The South Korean won has dropped 8.7%, the Philippine peso has fallen 8.1% and the Taiwan dollar has lost 7.6%. Stocks trimmed a rally yesterday spurred by softer-than-expected US inflation data as investors digested comments from Fed officials who remained resolute on the need for further interest-rate hikes.
Emerging Asia currencies are still nursing heavy losses this year. The South Korean won has dropped 8.7%, the Philippine peso has fallen 8.1% and the Taiwan dollar has lost 7.6%. Stocks trimmed a rally yesterday spurred by softer-than-expected US inflation data as investors digested comments from Fed officials who remained resolute on the need for further interest-rate hikes.
Europe’s Stoxx 600 Index gave up most of an initial advance, a day after surging to the highest in two months following the CPI report. — Bloomberg
US futures were off their highs for the session after the S&P 500 hit a three-month high and the Nasdaq 100 pulled 20% above a June low on Wednesday.
“The Fed is still very clearly on a tightening path,” Sonja Marten, chief currency strategist at DZ Bank AG, said on Bloomberg Television. “Inflation might have come down slightly, but it’s still at 8.5%, which is still very high with a very tight labour market. There is no reason for the Fed to slow down now. They’re going to keep going and then slow down in the coming year.”
A dollar index slipped, adding to retreat a day earlier that was the biggest since the onset of the pandemic. Short-term Treasury yields held a drop on investors’ scaled-back expectations of how aggressively the Fed will have to tighten monetary policy.
Minneapolis Fed President Neel Kashkari said he wants the Fed’s benchmark interest rate at 3.9% by the end of this year and at 4.4% by the end of 2023.
Alluding to market pricing of the Fed’s policy path, Kashkari said it was not realistic to conclude that the Fed will start cutting rates early next year, when inflation is very likely to be well in excess of the 2% goal.
Chicago counterpart Charles Evans said inflation remains “unacceptably high” and that “we will be increasing rates the rest of this year and into next year.”
Swaps referencing the Fed’s September meeting brought a half-point rate increase back into play as opposed to a bigger move. A key portion of the Treasury yield curve remains deeply inverted, a pattern widely thought to signal the risk of a recession.
Elsewhere, crude oil extended gains as the International Energy Agency boosted its forecast for global demand growth this year as soaring natural gas prices and heatwaves spur industry and power generators to switch their fuel to oil. - Bloomberg
