Emerging Asian currencies fell on Monday after data showing a rebound in US wage growth buttressed expectations for more Federal Reserve interest rate hikes in 2017. Although US employment increased less than expected in December, US jobs data on Friday showed a rebound in wages, pointing to sustained labour market momentum. In addition, Chicago Federal Reserve President Charles Evans said on Friday the Fed could raise interest rates three times this year, faster than he had expected just a few months ago and in line with the majority of his colleagues.
The comments from Evans reinforced the view that the Fed, which raised interests rates in December for the first time in a year, could step up the pace of its rate hikes if the incoming Trump administration unleashed fiscal stimulus. "With expectations of more rate hikes on the horizon, we believe the dollar will resume its upward trend versus EM Asian currencies in the coming weeks," Qi Gao, FX strategist for Scotiabank in Singapore, said in a research note.
Market participants, however, should watch out for the risk of dollar pull-backs, Gao wrote, adding that such moves could be triggered by weak US economic data or if any Fed officials were to raise concerns over dollar strength. The South Korean won fell about 1.2 percent against the dollar in onshore trade on Monday. Most other emerging Asian currencies also fell, including the Indian rupee , which shed 0.4 percent.
The offshore Chinese yuan slipped 0.5 percent, giving back some of the sharp gains made last week, when it gained about 1.8 percent in a record weekly rise. The onshore yuan was steady on the day. The spurt in CNH last week was driven predominantly by a jump in yuan borrowing costs offshore and tighter liquidity, which helped trigger the unwinding of bullish bets on the dollar.
"Despite some semblance of order emerging, we should expect volatility to remain high," Stephen Innes, senior trader for FX broker OANDA said in a note. "I also expect that the underlying yuan depreciation pressures should return as fundamental reasons that are driving depreciation, such as capital outflows and concerns on Trump's China policies...haven't changed," Innes wrote.
Emerging Asian currencies have retreated broadly over the past couple of months as US bond yields jumped on expectations that President-elect Donald Trump's proposals for infrastructure spending and tax cuts will boost US economic growth and inflation. Worries about Trump's stance on trade have also weighed on Asian currencies. Trump has vowed to label China a currency manipulator on his first day in office, and has threatened to slap huge tariffs on imports of Chinese goods.
China's foreign exchange reserves fell to near six-year lows in December, but held just above the $3 trillion level, as authorities stepped in to support the weakening yuan ahead of Trump's inauguration. While the $3 trillion mark is not seen as a firm "line in the sand" for Beijing, concerns are swirling in global financial markets over the speed with which the country is depleting its ammunition to defend the currency and staunch capital outflows.