Asia's worries over currency volatility get in the way of rate cuts
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[August 25, 2023] By
Ankur Banerjee
SINGAPORE (Reuters) - A spurt in the U.S. dollar and China's defense of
the yuan are forcing Asian central banks to step up interventions in
their weakening currencies, and one clear casualty is their desire to
slowly ease monetary policy to shore up cooling economic growth.
Central banks from Indonesia, South Korea and the Philippines kept rates
unchanged as expected this month.
But investors who were hoping they would hint at eventual rate cuts,
citing cooling inflation and the need for stimulatory economic settings,
found instead the focus had turned to currency weakness.
"Asian central banks are quite cautious about premature rate cuts," said
Moh Siong Sim, a currency strategist at Bank of Singapore.
"They don't want to be in a situation of premature easing and the
rhetoric is starting to change as well," Sim said, pointing to Bangko
Sentral ng Pilipinas' message on keeping the door open to future hikes.
"I think that's a signal that the currency weakness is starting to
figure into the thinking."
Besides making clear that they discourage speculation in their
currencies, the Reserve Bank of India and Bank Indonesia have stepped
into markets over the past few days to support their depreciating
currencies. Central banks in the Philippines and Thailand have warned
they may do the same.
In contrast, Latin American central banks have kicked off monetary
easing cycles, with Brazil's central bank cutting rates by more than
expected at the start of the month.
In Asia's backyard, China has stepped up efforts to defend the yuan
after its 5% sharp decline fuelled by a faltering post-pandemic economic
recovery and widening yield differentials with major economies.
That's forcing its peers in Asia to shift focus from mere export
competitiveness to currency stability and capital flows.
INDIRECT MEASURES
Bank Indonesia kept policy rates unchanged on Thursday, but highlighted
its intent to keep the rupiah stable.
While the currency is up 2% against the dollar this year, it has
weakened recently as expectations that the Federal Reserve will keep
rates higher for longer lifted the dollar and U.S. yields.
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Chinese Yuan and U.S. dollar banknotes
are seen in this illustration taken February 10, 2020. REUTERS/Dado
Ruvic/Illustration
Indonesia's current account swung into a deficit for the first time
in two years in the second quarter.
"All countries are experiencing currency depreciations, our focus is
to stabilize the exchange rate through intervention," Bank Indonesia
Governor Perry Warjiyo said.
Bank Indonesia also announced it will auction new short-term
certificates from next month, a move aimed at attracting foreign
investment inflows even as U.S. yields rise.
"For the rupiah, it's been more a case of not responding to their
much better inflation numbers, but perhaps worrying a bit more about
the current account, ... which is no longer providing quite so much
support to the currency," said Rob Carnell, ING's regional head of
research for Asia-Pacific.
"They've been holding back from easing and I think basically waiting
for a point where either the U.S. dollar unilaterally starts to
weaken or such time where this higher-for-longer view starts to
crumble."
South Korea is not ruling out a rate cut by year end, despite a
wobbly won that's down over 5% this year against the dollar.
The Philippine peso has slipped nearly 2%, having touched a
nine-month low last week on concerns over China and the Fed.
Analysts expect Asian central banks to eventually start cutting
interest rates, although most seem reluctant to start monetary
easing until next year, when the hope the Fed's plans and inflation
trends will be more clear, a Reuters poll shows.
"This is just a sort of period they've got to get through," ING's
Carnell said. "If they can sort of weather this by doing nothing. By
not cutting, but just sort of sitting with rates at a modest
modestly restrictive level."
(Reporting by Ankur Banerjee in Singapore, additional reporting by
Gayatri Suroyo in Jakarta; Editing by Vidya Ranganathan and Kim
Coghill)
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