Updated January 3rd, 2024 at 14:48 IST
The optimism is fuelled by the Federal Reserve’s unexpected dovish stance.
Asian currency | Image:Shutterstock
Wednesday witnessed a widespread downturn for most Asian currencies and equities, signalling caution among investors regarding riskier assets. This hesitancy stemmed from diminishing hopes of prompt US interest rate cuts preceding the release of the Federal Reserve’s December meeting minutes. MSCI’s emerging market currency index, which registered its most considerable single-day decline since February 2023 on Tuesday, experienced a 0.2 per cent drop. Notably, the South Korean won slipped by 0.3 per cent, while the Malaysian ringgit tumbled by 0.6 per cent, marking its most challenging day since early November.
Cautious market sentiment
The optimism surrounding Asian currencies and stocks towards the end of 2023, fueled by the Federal Reserve’s unexpected dovish stance hinting at the conclusion of the tightening cycle, led to anticipation of potential rate cuts as early as March. However, Moh Siong Sim, an FX strategist at Bank of Singapore, highlighted a cautious market sentiment regarding the excessive pricing of Fed rate cuts. This reevaluation might favour the US dollar while exerting pressure on Asian currencies.
Concurrently, the US dollar maintained its position close to a two-week high against major counterparts, alongside US Treasury yields hitting a two-week peak. In Asia, stock markets experienced declines, notably South Korea plummeting over 2 per cent following a 19-month high on Tuesday. Taiwanese equities slid by 1.7 per cent, and Singaporean stocks retreated by 0.8 per cent, marking their most challenging session since early November.
Anticipation lingered for the Federal Reserve’s meeting minutes and awaited additional insights into potential rate cuts. Additionally, markets were keenly eyeing a plethora of US economic data and inflation updates from Thailand and the Philippines, amid a prevailing trend of easing inflation across several Asian nations.
Despite the cooling inflation trend, most Asian central banks maintained a cautious stance on monetary policy, aiming for tight control to align with inflation targets. While there’s a gradual shift in tone post-Fed’s pivot in December, Asian central banks seem cautious about pre-emptive rate cuts compared to the Fed’s stance, signalling a measured approach towards monetary policy adjustments.
(With Reuters inputs)
