Asia forex Moody's China downgrade sours mood

Asian currencies weakened on Wednesday as an unexpected downgrade of China's debt rating by Moody's hit sentiment, and dealers awaited the release later in the global day of minutes from this month's US Federal Reserve policy meeting. Moody's Investors Services downgraded China's long-term local and foreign currency issuer ratings citing expectations that the financial strength of the world's second-biggest economy would dwindle in the coming years.
The move took a toll on Asian stocks as it heightened concerns over tighter regulation, rising borrowing costs and signs of an economic slowdown in China. Asian shares excluding Japan were about 0.3 percent lower, despite gains on Wall Street overnight. "It's quite clear that it's going to be quite negative in terms of sentiment, particularly at a time when China is looking to derisk the banking system, as well as at a time when there's going to be some potential restructuring of SOEs (state-owned enterprises)," said Vishnu Varathan, head of economics and strategy at Mizuho Bank's Treasury.
The Chinese yuan eased 0.04 percent, making its fourth session of decline in the past five days However, analysts believe currencies whose economies are dependent on exports to China could show signs of stress during the session. "To some extent yen may be affected. Some commodity related currencies in the region too: the IDR (Indonesian rupiah), for example; and the (Philippines) peso," said Saktiandi Supaat, head of FX research at Maybank in Singapore.
The yen and the rupiah were both marginally off. The Thai baht was 0.1 percent lower ahead of a central bank policy meeting later in the day where the Bank of Thailand is expected to stand pat on its benchmark interest rate of 1.5 percent. The peso was the biggest loser in the region, extending losses from the previous session by falling 0.3 percent, its biggest drop in two weeks. Analysts believe that while Philippines may not have a massive resources export relationship with China, it certainly has tightened structural relationships with China over time.
In its first policy meeting since president Moon Jae-in took office on May 10, the Bank of Korea is expected to keep its base rate unchanged at 1.25 percent on Thursday, a Reuters poll showed. Of the 19 economists surveyed, nine expect a rate hike next year as the bank's next move, while the rest expect no moves for some time. The central bank's assessment of the economy will be the focus of attention in the meeting. The won lost 0.2 percent, and is headed for a second straight session of decline.