Most Asian currencies pull back as rate cut rally dissipates

BENGALURU: Most Asian currencies and equities lost ground in a broad sell-off on Wednesday as optimism about imminent rate cuts faded ahead of the Federal Reserve’s December meeting minutes later in the day and investors cut positions in riskier Asian assets.

MSCI’s emerging market currency index, which posted its steepest one-day drop since February 2023 on Tuesday, was down 0.2%. The South Korean won slid 0.8%, while the Malaysian ringgit retreated 0.7% heading for its worst day since early November.

Asian currencies and equities were rallying near the end of the 2023, after an unexpectedly dovish shift from the US Federal Reserve fuelled bets that the rate hiking cycle was over with markets starting to anticipate rate cuts as early as March.

“I think the market is probably turning a bit more cautious over the Fed rate cut pricing given that some of this could have been overdone,” Moh Siong Sim, FX strategist at Bank of Singapore said.

Asian currencies have benefited from rate cuts expectations but as rate cuts pricing looks overdone and markets reassess the situation, the rate cuts pricing might support the dollar and work against Asian currencies, he added.

The US dollar was hovering near a two-week high against its major peers on Wednesday while US Treasury yields popped to two-week highs overnight.

Consequently, regional equities dropped, with those in South Korea falling nearly 2%, after hitting a 19-month high on Tuesday. Taiwanese stocks slid 1.8% while stocks in Singapore retreated 0.6%.

Markets now await the minutes of the Federal Reserve’s last policy meeting due later in the day for further clues on rate cuts this year.

Inflation data from Thailand due on Thursday and from the Philippines on Friday are also on investor’s radar. Recent data have shown an easing trend in inflation in Asian countries with annual inflation in Indonesia cooling more than expected in December.

The Indonesian rupiah was largely unchanged while equities were down 0.3%.

Although inflation has been cooling in most Asian countries, most Asian central banks are still on the restrictive side of monetary policy setting with the Philippine central bank stating last month that policy would have to stay “sufficiently tight” to bring inflation back to target.

“Asian central banks are likely not in a rush to cut rates and won’t be ahead of the Fed in cutting,” Alex Loo, macro strategist at TD Securities said.

However, we suspect there is a gradual shift in tone after the Fed’s pivot in December with Asian central banks such as the Bank of Korea dialling back their hawkish tone, he added.