(Bloomberg) -- 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 and the long-beleaguered Chinese yuan were some of the beneficiaries of the turmoil, even though they gave up some of their gains 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.
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 labor 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 intensified in Korea, Thailand and Malaysia.
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 Thailand, Indonesia and Korea are due later this month.
Indonesia’s central bank is now expected to reduce rates by 25 basis points each quarter starting in September, rather than December, according to Bank of America Corp. Kai Wei Ang, the bank’s economist, said “room for monetary policy easing has opened up” and that a cut in August couldn’t be ruled out.
Meanwhile, China’s bond market has rallied on investor hopes of more interest-rate cuts in the world’s second-largest economy. China’s state banks sold government bonds in large batches, a move that helped to pull benchmark yields higher from record lows, Bloomberg News reported Monday citing traders.
What Bloomberg Economics says....
“Lower US rates would give the People’s Bank of China more room to trim the medium-term lending facility rate. Our baseline forecast is for just one more cut of 10 basis points, in 4Q, bringing total reductions to 30 bps in 2024. But the chances of 20 bps in cuts before year-end are growing.
- Chang Shu, chief Asia economist. Read more here
But the dust hasn’t settled yet. Headline inflation picked up in Korea and India in recent months, while Philippine central bank Governor Eli Remolona on Aug. 6 signaled a weaker chance for a rate cut next week after inflation hit a nine-month high.
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 said of central banks in the region. “Particularly while markets are so volatile.”
--With assistance from Matthew Burgess, Neha D'silva, Marcus Wong, Swati Pandey and David Finnerty.
(Updates with market moves, analyst comments from second paragraph)
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