Emerging Asian currencies firm on Fed surprise

The Fed abandoned plans for any interest rate hikes this year amid signs of an economic slowdown, and said it would halt the steady decline of its balance sheet in September.
The Fed abandoned plans for any interest rate hikes this year amid signs of an economic slowdown, and said it would halt the steady decline of its balance sheet in September. PHOTO: REUTERS

US central bank shelves plans for rate hikes this year amid signs of economic slowdown

BENGALURU • Emerging Asian currencies firmed yesterday as the greenback weakened after the US Federal Reserve surprised markets by bringing its three-year tightening drive to an earlier-than-expected end.

The Fed on Wednesday abandoned plans for any interest rate hikes this year amid signs of an economic slowdown, and said it would halt the steady decline of its balance sheet in September.

The Indonesian rupiah strengthened as much as 0.6 per cent against the dollar, touching its highest level since Feb 28. The rupiah has outperformed its peers by a vast margin this year after declining nearly 6 percent last year.

Bank Indonesia is due to release a policy decision later in the day, and is widely expected to keep interest rates unchanged for a fourth straight month.

Indonesia's finance minister said yesterday that the Fed's forecast for no rate hikes this year "will be good for the global economy" as markets will be calmer than in 2018, when the US central bank raised rates four times.

Economists at Citi said in a note: "The dovish Fed surprise may trigger a bullish re-think of ranges for emerging Asia forex markets. However, a sustained bullish break-out may still be contingent on a US-China (trade) deal with a potential currency stability clause especially for Chinese yuan and allied currencies. In the meantime, high yielding Asia forex may outperform."

The South Korean won strengthened 0.3 percent, in tandem with the local equity index, while the Taiwan dollar edged higher.

Central banks in Taiwan and the Philippines are also expected to leave rates unchanged later in the day, with investors looking for any hints of future easing after the Fed decision.

Meanwhile on the trade front, President Donald Trump warned on Wednesday that the United States may maintain tariffs on Chinese goods for a "substantial period" to ensure Beijing complies with any trade agreement.

DOVISH SURPRISE

The dovish Fed surprise may trigger a bullish re-think of ranges for emerging Asia forex markets. However, a sustained bullish break-out may still be contingent on a US-China (trade) deal with a potential currency stability clause especially for Chinese yuan and allied currencies.

ECONOMISTS AT CITI

US-China trade talks are set to resume in Beijing next week, after Mr Trump delayed a March 1 deadline to avert a rise in tariffs on US$200 billion (S$270 billion) worth of Chinese imports.

The Thai baht appreciated 0.2 per cent, after data released yesterday showed that the country's Customs-cleared exports unexpectedly rose in February, after contracting for three consecutive months.

Indian financial markets were closed for a public holiday.

The Chinese yuan strengthened as much as 0.4 per cent, rising to an eight-month high against the dollar.

China's central bank yesterday lifted it official yuan midpoint to the strongest level in eight months at 6.6850 per dollar.

"While the comments from Trump on the trade front suggest that there is still a risk we might not get a deal, for now markets have brushed it aside," said head of Asia research Khoon Goh of ANZ Banking Group (Singapore).

Currency has been a point of contention between US and Chinese officials during trade talks, with Washington seeking assurance that Beijing will not depreciate its currency to offset the impact of any US measures.

Earlier this month, People's Bank of China governor Yi Gang said China's central bank has exited from regular intervention on foreign exchange, adding that Beijing will not use it to boost its exports.

REUTERS

A version of this article appeared in the print edition of The Straits Times on March 22, 2019, with the headline 'Emerging Asian currencies firm on Fed surprise'. Print Edition | Subscribe