Asian bourses rally as Fed chief urges caution in interest rate hike

Federal Reserve chair Dr Yellen reiterated a need to "proceed cautiously" in lifting rates.
Federal Reserve chair Dr Yellen reiterated a need to "proceed cautiously" in lifting rates.PHOTO: AGENCE FRANCE-PRESSE

Investors doubled down on equities, giving bourses across most of Asia a hefty lift after United States Federal Reserve chair Janet Yellen reiterated the need for a more cautious pace in raising interest rates.

The Straits Times Index rallied 1.9 per cent to 2,872.78. Elsewhere in Asia, Hong Kong jumped 2.1 per cent, Shanghai leapt 2.8 per cent and Shenzhen surged 3.6 per cent.

Dovish remarks from Dr Yellen sent most Asian currencies, including the Singdollar, up against the greenback. As at 8pm, the US dollar was trading at 1.3527 to the Singdollar - the local currency's best showing since July 13, 2015 - after ending at 1.3677 on Tuesday. The Malaysian ringgit firmed to 3.9316 against the greenback from 3.9976 on Tuesday, and 4.0102 on Monday.

There was good news here for borrowers too - both commercial and home mortgage holders.

The three-month swap offer rate (SOR), used to price commercial loans, dived to 0.81 per cent yesterday - a level last seen in July last year - from 0.9 per cent on Tuesday. It was at 1 per cent on March 24, before the Easter break.

The SOR plunge has been spectacular, given that the 52-week high came on Jan 13, three months ago, at 1.76 per cent.

The three-month Sibor or Singapore interbank offered rate, used to price home loans, fell to 1.17 per cent yesterday, down from the year's high of 1.25 per cent on Jan 19.

The SOR tends to be affected more by external factors, such as Fed fund rate hikes, while Singdollar liquidity influences the path of the Sibor.

It is therefore not surprising that the SOR has been more volatile over the last 12 months as the Fed began to raise rates, said Mr Kelvin Tay, regional chief investment officer at UBS Wealth Management.

Owing to weaker-than-expected global growth and a cloudy US inflation outlook, Dr Yellen reiterated a need to "proceed cautiously" in lifting rates. Her comments came as improving US inflation and manufacturing data prompted other Fed officials to say a rate hike could come as soon as next month.

"The commentary by various Fed speakers might seem contradictory but they are not too wide off the mark from each other... In essence, one was talking about why they should hike and the other was talking about the pace of the hike," said Mr Tay.

In light of Dr Yellen's cautious remarks, "market expectations for any near-term FOMC (Federal Open Market Committee) rate hikes and... any Monetary Authority of Singapore policy easing in April have petered out," said Ms Selena Ling, head of treasury research and strategy at OCBC Bank.

Both UBS and OCBC expect two Fed rate hikes this year, with one likely in June. "If the June rate hike does materialise, then the US dollar-Singdollar could tread higher again in the second half," she said.

Citi Research economists downgraded their forecast for Fed tightening this year to only one hike, either in September or December.

"Dr Yellen's reiteration of this dovish message will help reduce uncertainty... and should (support) expectations for a dovish Fed even in the face of robust data in the short run," Citi said.

A version of this article appeared in the print edition of The Straits Times on March 31, 2016, with the headline 'Asian bourses rally as Fed chief urges caution in interest rate hike'. Print Edition | Subscribe