The global market selloff may have a silver lining for Asian central banks if sustained weakness in the dollar gives them leeway to ease monetary policy.
Asian currencies shot up to a five-month peak against the greenback this week, amid tectonic shifts in global markets due to a range of concerns — not least worries that US rate setters have been too slow to ease policy. Malaysia’s ringgit led the charge in emerging Asia on Monday, followed by the long-beleaguered Chinese yuan. Bloomberg’s index of Asian currencies was softer on Tuesday.
Exchange-rate weakness is one reason central banks, including in China and South Korea, have been wary of lowering interest rates, even though price pressures across emerging Asia have largely been lower than in most major advanced economies.
Meantime, higher US yields have discouraged global funds from investing in Asia. That might all be about to change as mounting bets on Federal Reserve rate cuts shift the balance in favor of the region.
“The soft dollar and lower US yields backdrop shall give more headroom for Asian central banks in terms of potential monetary easing, if their domestic macro conditions justify rate cuts,” said Frances Cheung, a rates strategist at Oversea-Chinese Banking Corp (OCBC).
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Investors ramped up bets on a Fed pivot toward rate cuts after its meeting Wednesday where Chair Jerome Powell signaled a September cut could be on the table was followed up by soft labour market data on Friday.
The swaps market is pricing in a near 50-basis-point Fed rate cut in September, while data compiled by Bloomberg show expectations for lower policy rates in the coming months have intensified in South Korea, Thailand and Malaysia.
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The rupiah climbed for a fourth session on Monday, strengthening along with other currencies in the region, after data showed Indonesia’s economy expanded slightly above forecast last quarter. Inflation figures for the Philippines, Taiwan and Thailand this week will help shape investor expectations for the trajectory of policy in those economies too.
A weaker US dollar — if the move is sustained — would be a reversal for officials in Taiwan and Indonesia, who had to raise interest rates earlier this year to defend their currencies. India’s central bank is seen shifting to a neutral stance later this week, while rate decisions for the Philippines, Thailand, Indonesia and South Korea are due later this month.
Meanwhile, China’s bond market has rallied on investor hopes of more interest-rate cuts in the world’s second-largest economy.
“Asia central banks now have more autonomy to guide settings towards domestic goals if needed,” according to a note by DBS Group Holdings. “Some rate cuts are probably in the offing for selected central banks that have been constrained over the past year.”
But the dust hasn’t settled yet. Headline inflation picked up in South Korea and India in recent months. The dollar’s traditional role as a haven could always kick in if markets continue to wobble or geopolitical threats in the Middle East escalate.
So could a return of the “Trump trade” — wagers on assets like the dollar or Bitcoin seen as benefiting from looser fiscal policy and higher tariffs if Donald Trump were to return to the White House.
“They will probably not cut until after the Fed has cut,” said Jon Harrison, managing director for emerging-market macro strategy at GlobalData TS Lombard in London. “Particularly while markets are so volatile.”
