Asian currencies slip as bond sell-off dampens risk sentiment

BENGALURU: Emerging Asian currencies remained subdued on Friday and equities slid, pressured by a continuing surge in long-term US Treasury yields on growing concerns that the Federal Reserve might keep interest rates elevated for longer.

The Malaysian ringgit weakened 0.2% and was still at its lowest since 1998. The currency was set for its eighth consecutive weekly decline. The Thai baht also inched 0.2% lower.

A sell-off in the US bond market continued, causing yields on 10-year US Treasuries, which sets the tone for borrowing costs globally, to briefly reach 5% for the first time since 2007 in the previous session.

Rising expectations that the Federal Reserve is likely to keep interest rates higher for longer and mounting US fiscal concerns have held investors from making risky bets.

“Treasury yields rising further should compress an already low interest rate differential offered by EM Asia, and this should in general be detrimental to EM Asia FX,” Vijay Vikram Kannan, Asia macro strategist at Societe Generale in Singapore, said.

Kannan added that currencies that are more dependent on capital flows and have relatively lower fire power to intervene, could be more vulnerable to forex weakness, and might have to import the higher US yields environment.

The Indonesian rupiah declined 0.3% and hovered near a 3-1/2-year low. The rupiah has lost nearly 2.6% in October, and is on course to post its seventh consecutive weekly decline.

Indonesia’s central bank has intervened with “slightly higher intensity” in the spot FX and domestic non-deliverable forward markets to avoid “extreme” rupiah volatility, Bank Indonesia’s (BI) head of monetary management Edi Susianto said.

BI unexpectedly raised interest rates on Thursday to arrest the rupiah’s decline amid US monetary tightening and rising geopolitical risks.

“The main priority (of BI) at present is to anchor currency stability, even if it means having to engineer higher level of money market rates and bond yields,” analysts at DBS wrote in a note.

“If market outlook on IDR FX turns more positive, that would help to stem financial outflows, and by extension, reduce the need/scope for adjustment in level of IDR rates.”

Regional equities also declined after US stocks ended significantly lower for a second session overnight, amid surging yields and concerns of conflict in the Middle East.

Stocks in South Korea, the Philippines and Thailand slumped between 0.9% and 1.3%.

Stocks in Shanghai fell 0.3% and yuan edged 0.1% lower.

China kept its benchmark lending rates unchanged at the monthly fixing, matching market expectations, as a set of economic data suggested the economy is stabilising and a weaker yuan constrained further monetary easing.