Fed cut positive for Asia stocks and risk currencies, analysts say

Melbourne – The US Federal Reserve’s decision to cut its benchmark interest rate by 50 basis points is likely to be a positive for Asian stocks as it gives the region’s central banks more room to loosen policy, analysts say.

The rate cut will ease the pressure of tight monetary policy and assuage concern about weakening local currencies, said Mr Gary Dugan, chief executive officer at Dalma Capital.

Mr Brad Bechtel, global head of foreign exchange at Jefferies, said the outcome is good for risk assets and high-yield currencies but forex moves may be muted in Asia as the Chinese yuan serves as an anchor.

Here is a selection of comments from analysts.

Straits Investment Management chief executive officer Manish Bhargava:

Lower US interest rates could boost risk appetite for Asian stocks, driving capital inflows into emerging markets as investors seek higher returns.

The initial phase of the Fed’s normalisation cycle has been more assertive than expected, as the central bank recalibrated its policy focus to address labour market conditions. While inflation remains a key concern, recent softening in employment metrics has prompted the Fed to adjust its strategy, emphasising support for the job market in the near term.

Dalma Capital CEO Gary Dugan:

The Fed action should be taken very positively by Asian markets. It relieves the pressure of tight monetary policy and with likely weakness in the US dollar, it allows Asian central banks to ease monetary policy without fear of prompting weakness in their own currencies.

We expect further strength in interest-rate sensitive stocks such as financials and real estate investment trusts. We also expect domestic consumer stocks to do well in anticipation of higher confidence among consumers. Borrowing costs have been (high) and now, they should be headed down.

BetaShares Holdings head of fixed income Chamath De Silva:

It is actually anyone’s guess. I am not expecting big moves and it would not surprise me if Asian equities end the session little changed and wait for more clues from tonight’s follow-up US market reaction.

In some ways, it was the classic market reaction for the start of an easing cycle: steeper curve, marginally higher break-evens. But it was also consistent with a hawkish surprise in other markets: weaker gold, higher yields in the belly and long end, and stronger US dollar.

Jefferies global head of foreign exchange Brad Bechtel:

Price action post-Fed was a mild position flush and perhaps there will be more US dollar buying in Asia, particularly against the yen, won and yuan, while traders may take profits following the rallies in rupiah, ringgit and baht.

It is good for risk, which implies it is good for higher-beta currencies and those are generally those currencies with higher real yields. But I do not expect a big reaction in in the Asian foreign exchange market as the yuan more or less anchors things.

Wells Fargo emerging market strategist Brendan McKenna:

The Asia foreign exchange market will struggle for direction and may see some profit taking after the recent rally. If data points to 25 basis point cuts from here, that would strengthen the dollar.

For the Asia foreign exchange market rally to continue, you might have to see another 50 basis point cut from the Fed. Today by itself, for now,  does not offer a tonne of direction for the Asia foreign exchange market or even broader markets.

PT Bahana Sekuritas head of research Satria Sambijantoro:

The dovish cut is effectively giving appreciation momentum for emerging market currencies with the rate cut so far not being interpreted as a gloomy view on the US economy.

We expect foreign flows to Asean and Indonesia to gather momentum, with Indonesia being at the Goldilocks zone of resilient gross domestic product growth, relatively high credit expansion and front-loaded monetary policy easing. BLOOMBERG