Fed’s slower pace spreads to emerging markets
investmentnews.comAsian central banks’ need for assertive defense of their currencies is driving traders to turn less dovish on monetary policies in the region.
Interest rate swaps for South Korea, Malaysia, and Thailand all jumped in recent weeks, a sign that traders are paring rate-cut expectations in those emerging markets. The Bloomberg Asia Dollar Index fell 0.8% in April, set for the fourth straight monthly decline, as solid US economic data and more hawkish bets for the Federal Reserve steer investors to the dollar.
“With later and fewer Fed rate cuts, we also adjust our forecasts for Asian central banks – projecting a later start for an even shallower rate cut path,” Morgan Stanley economists including Chetan Ahya wrote in a note dated April 15. China, South Korea, Indonesia, the Philippines and Taiwan particularly are the markets that will likely see rate cut delays, they said.
For now, the region’s central banks have generally stuck to non-rate tools to support local currencies. More aggressive policy action may be needed if the weakness persists, with higher-for-longer rates or even a resumption of rate hikes being possible options.
Here are how rate cut expectations have ebbed in emerging Asia:
Traders are pricing around a 5-basis point cut over the next twelve months, reining in their expectations for a full quarter-point cut at the end of March, according to Bloomberg-compiled data. As a net energy importer, elevated oil prices are driving import prices higher and threaten policymakers’ efforts to combat inflation. “With the strong data coming from US and oil price going higher, the ‘high for longer’ theme has come back to markets again,” BNP Paribas’ global markets strategists Chandresh Jain and Parisha Saimbi wrote in
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