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Asian currencies’ drop to a seven-year low will probably deter regional central banks from easing monetary policies as the prospects of higher US rates spurred capital outflows.
Bank Negara Malaysia on Wednesday kept its benchmark interest rate unchanged at 3%, signalling that policy makers are focused on protecting the ringgit rather than spurring growth.
Bank Indonesia governor Agus Martowardojo said last week the monetary authority sees narrowing room for further easing.
“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 103.32, the lowest level since March 2009 as odds of a rate increase in December by the Federal Reserve climbed. Fed funds futures are pricing in 100% chance the US central bank will tighten next month, compared with about 71% 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.
‘Greater uncertainties’
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 Nov 9 meeting released on 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.
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 Nov 18.
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, Mr 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.
