Why are Asian central banks in a tight spot?
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. 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 three per cent, signaling 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 emergingmarket economist in Tokyo at Daiichi Life Research Institute, 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 percent chance that the Federal Reserve will raise US interest rates in December. That’s up from about 70 per cent 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 seven per cent. 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 a November 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.