Regional currencies steady ahead of Fed rate hike
No significant short-term volatility but sentiment is still cautious
PETALING JAYA: Emergingmarket currencies in South-East Asia are holding steady ahead of this week’s United States Federal Reserve (Fed) meeting, which may potentially see another interest rate hike.
This is in stark contrast to last December when emerging-market currency exchange rates steeply weakened ahead of the Fed’s second rate hike, which was announced on Dec 15.
On that day, it increased the key interest rate by 0.35 percentage points to a range of 0.5% and 0.75%.
Similarly, in the run-up to the first rate hike in December 2015, when the Fed raised rates to a range of 0.25% and 0.5%, emerging-market currencies, including the ringgit, fell to multi-year lows.
“While the sentiment is still cautious, we have not seen any significant short-term volatility like before. From a year-to-date perspective, it looks like the ringgit is heading for a modest recovery,” said a foreign-exchange strategist at a local bank.
The ringgit was essentially flat at RM4.4480 to the dollar at 5pm yesterday from RM4.4497 on Tuesday. The currency has strengthened from a low of RM4.50 earlier this year to RM4.45 presently.
Other currencies which are highly sensitive to the US dollar’s movement have also held steady. For example, both the Thai baht and Philippine peso have traded in ranges of less than 1% over the past one month.
The Bloomberg Dollar Index, which represents the trajectory of the dollar against a basket of global currencies, is currently hovering at around 1,244 points, or some distance from its peak of 1,277 points on Jan 3.
In a note yesterday, Morgan Stanley Research adopted a more hawkish view on the trajectory of the Fed’s future rate hikes. In light of the new economic data, it is now predicting the Fed to raise rates seven times over the next two years instead of five times.
According to the research house, the next tightening cycle presents two possible outcomes. One is that the interest rate hike would be benign for Asian markets, which is what happened during the 20042006 cycle.
Another scenario, which happened during the so-called taper tantrum in 2013, could trigger renewed volatility due to capital flight and the deleveraging of credit, it said.
“We think the 2017-2018 Fed tightening would be a cross between the past two cycles. The expected rise in US yields is unlikely to severely affect economies in Asean, South Korea and Taiwan, as external imbalances have narrowed and real rate differentials have gone higher for current account deficit economies,” it said.
As for regional currencies, Morgan Stanley prefers low yielders such as the Korean won and the Thai baht. Conversely, it continues to be bearish on the Philippine peso and cited Malaysia as the most exposed to adverse macroeconomic outcomes in the region.
The prospect of further rate hikes is supportive of the US dollar, which has largely advanced since November last year following Donald Trump’s victory in the US presidential election. However, the greenback has eased as of late.
Last Friday, the US Government reported that 235,000 new jobs were added to the US economy in February, bringing the total number of jobs created this year to nearly half a million.
Strong growth and job numbers in the US of late has spurred optimism over the sustainability of the US economy.
The Fed began its two-day monetary policy meeting on Tuesday and is expected to release its post-meeting statement today.
The rate hike to a range of 0.75% and 1% is widely expected, given the encouraging signs of steady US economic growth.