The worst may be over for emerging Asian currencies as slower-than-expected US inflation eases pressure on the Federal Reserve to aggressively raise interest rates, according to DBS Group Holdings Ltd. and Malayan Banking Bhd.
The US data released Wednesday led to a slump in the dollar, which led to a jump in the region's currencies across the region, following their developing-nation peers in the Americas and Europe. The Thai baht gained by 0.9%, while the Indonesian rupiah increased by 0.7%.
Philip Wee, a senior foreign-exchange strategist at DBS in Singapore, said that the US inflation data affirmed our assumption for the dollar to return gains against Asian currencies starting this quarter. The worst is likely to be over for Asian currencies, though volatility will persist. A weaker dollar will help reduce the pressure on Asian central banks to raise borrowing costs and support economic growth in the region, as there is a risk of a recession in the US and other developed nations.
Fund inflows show that there's been a lot of optimism towards emerging Asian assets in the past few months. This month alone, global investors have bought a net $2.06 billion of Indian stocks and $1.25 billion of Korean equities, along with $1.71 billion of Korean bonds and $721 million of Indonesian debt.
JPMorgan Asset Management shifted its overweight position on Indonesian bonds this month, saying that any selloff would be a good opportunity to buy duration.
The Labor Department said that the annual US consumer-price gains fell to 8.5% in July from a 9.1% June advance that was the largest in four decades.
Yanxi Tan, a currency strategist at Maybank in Singapore, said that our baseline has always been for US inflation to grind lower over time, and for growth jitters to become more apparent into year-end. That would support a retracement of the dollar's strength against Asian FX in the second half of the year. As risk sentiment improves, the euro, the won, and commodity currencies will get a boost as risk sentiment improves, according to a research note by Kim Seunghyuk, a foreign-exchange analyst at NH Futures in Seoul.
There are those who remain bearish on Asian currencies, saying last week the better-than-expected payroll figures are a reason for the Fed to keep raising interest rates.
We are not chasing this lower move in USD Asia, said Trang Thuy Le, a foreign exchange strategist at Macquarie Capital Ltd. in Hong Kong. We don't think a CPI report is enough to change the rhetoric of the Fed. Between payrolls and the CPI, we throw our weight behind the strong payroll numbers. Emerging Asia currencies are still having heavy losses this year. The Korean won has dropped 8.7%, the Philippine peso has fallen 8.1% and the Taiwan dollar has lost 7.6%.