Asia’s accelerating currency rout set to sideline central banks

Bangkok/Singapore: Asian currencies’ drop to the weakest this decade will probably deter regional central banks from easing monetary policies as the prospects of higher US rates spurred capital outflows.

Indeed, they are more likely to be stepping in to smooth declines in their currencies—the rupee’s drop on Thursday reportedly prompted intervention from the Reserve Bank of India (RBI). The Bloomberg-JPMorgan Asia Dollar Index has tumbled to the weakest since 2009, the Philippine peso cracked 50 per dollar for the first time since the global financial crisis and forwards traders are expecting Malaysia’s ringgit will drop within a week to levels last seen in 1998.

Bank Negara Malaysia on Wednesday kept its benchmark interest rate unchanged at 3%, signalling policy makers are focused on protecting the ringgit rather than spurring growth. It has said it intervened in foreign-exchange markets. Bank Indonesia governor Agus Martowardojo said last week the monetary authority sees narrowing room for further easing. His central bank also sold dollars this month.

“Depreciating currencies are making it very hard for the regional central banks to ease monetary policy as falling FX rate raises concerns about inflationary pressure and acceleration of fund outflows,” Toru Nishihama, an emerging-market economist in Tokyo at Dai-ichi Life Research Institute Inc., said in a phone interview. “Most regional central banks will probably have to stay on hold for quite some time.”

International investors sold more than $12 billion of equities and bonds in Asia’s emerging markets after Donald Trump won the US presidential election, which spurred higher Treasury yields and a dollar rally on expectations of his fiscal plans.

The Bloomberg-JPMorgan Asia Dollar Index reached 103.29, the lowest level since March 2009, as futures traders see a 100% chance that the Federal Reserve will raise US interest rates in December. That’s up from about 70% at the end of October. One-month implied volatility for 10 major Asian currencies excluding the yen climbed to the highest level this month since February, deterring investors from taking risks in developing economies.

Before the market volatility triggered by Trump’s victory, Bank Indonesia was on an aggressive strategy to boost an economy that’s growing well below the government’s target of 7%. The central bank had cut interest rates six times this year. In Malaysia, new governor Muhammad Ibrahim surprised markets with a cut in July to spur growth.

Bank of Thailand said capital flow and foreign-exchange volatility are set to increase and the monetary authority needs to preserve policy space as Thai economy “would still be facing greater uncertainties,” according to minutes of 9 November meeting released Wednesday. Malaysia’s central bank said it will continue to provide liquidity for the nation’s currency market.

“Based on domestic economic developments, we see fundamental justification for policy rate cuts in Thailand, Indonesia and Malaysia, but they are likely to be deferred as weaker currencies place a constraint on policy,” said Mark Baker, portfolio manager for emerging-markets fixed income in Hong Kong at Standard Life Investments.

Among regional central banks that delivered interest-rate cuts this year are Bank of Korea and Bangko Sentral ng Pilipinas. Both central banks have said they stand ready to act if volatility becomes excessive.

The Philippines central bank is probably watching the peso, which pulled back after breaching 50 for the first time since June 2008, though it is hard to say if policy makers stepped in, Manila-based chief market strategist Jonathan Ravelas.

The rupee dropped as much as 0.4% to an unprecedented 68.865. State-run banks sold dollars, probably on behalf of the RBI, three Mumbai-based traders said, asking not to be named. That came as the rupee halted its opening slide, before resuming its decline to fall past the 68.8450 reached in August 2013.

Those keenest to ease, such as Indonesia and Malaysia, may be less able to do so under external and foreign-exchange stress, while those that were reluctant, like South Korea, Taiwan and Singapore, perhaps will need more easing, according to a Deutsche Bank AG note dated 18 November.

For Masakatsu Fukaya, a Tokyo-based emerging-markets trader at Mizuho Bank Ltd, Malaysia is the most vulnerable with a possibility of not being able to halt fund outflows that will keep the option of a rate cut “so far away.” Bank Indonesia will also struggle to lower the benchmark rate when the rupiah is sold-off and outlook is uncertain, he said.

By contrast, Fukaya expects the Bank of Korea to ease policy in the first half of next year despite the market volatility.

“Korea may even welcome certain weakness in the won and they don’t probably worry so much about fund outflows,” he said. Bloomberg