September 27, 2018 / 2:37 AM / 2 months ago

China, New Zealand shrug off Fed, but FX risks push Philippines and Indonesia into hikes

SYDNEY/SINGAPORE (Reuters) - China, Taiwan and New Zealand sat tight after the Federal Reserve’s latest rate hike, but Indonesia and the Philippines pulled the trigger on Thursday to prop up their battered currencies and temper risks to inflation and financial stability.

FILE PHOTO: U.S. dollars and other world currencies lie in a charity receptacle at Pearson international airport in Toronto, Ontario, Canada June 13, 2018. REUTERS/Chris Helgren/File Photo

In a statement that marked the end of the era of “accommodative” policy, Fed policymakers lifted rates by 25 basis points (bps) to 2.00-2.25 percent. The U.S. central bank foresees another hike in December, three more next year, and one in 2020.

The Fed outlook is pressuring Asian currencies across the board, but not all countries need to tweak their policy. New Zealand is comfortable with a weaker kiwi NZD= as it helps its exporters. In China, a weaker yuan CNY= does raise concerns about capital outflows, but its currency is tightly managed and it also has capital control tools to mitigate financial risks.

For countries that run widening trade deficits, however, weaker currencies are posing risks to inflation, growth and financial stability.

“Economies such as India and Indonesia are more exposed to outflows ... We will continue to see further depreciation in 2018 and throughout 2019, although perhaps at a slower pace,” said Carlos Casanova, APAC economist at Coface, who expects more hikes in the two countries and Philippines.

Bangko Sentral ng Pilipinas (BSP) hiked rates by 50 bps to 4.50 percent to curb inflation and shore up the fragile peso, adding to the three hikes worth 100 bps since May.

In August, inflation surged to a more than nine-year high of 6.4 percent, above the central bank’s 2-4 percent comfort range.

Bank Indonesia added 25 bps to its four previous hikes this year, bringing rates to 5.75 percent as expected, or 150 bps higher since May.

The peso PHP= is trading around its lowest in 12 years, having shed some 8 percent against the dollar year-to-date, while the rupiah IDR= is around a two-decade low after a 9 percent plunge.

Asia's worst performing currency, the rupee INR=, which has weakened by more than 12 percent to record lows, is also likely to be a key consideration for Reserve Bank of India, which is expected to hike by 25 bps next week.

All three currencies ended steady on Thursday.

One potential silver lining for the Asian deficit trio may be that the Fed is underestimating the impact of its past and future hikes as well as other factors such as the trade war on the global economy, and implicitly, the recoil back home, some analysts say.

Against a backdrop of slower-than-expected Fed tightening, ING Asia economist Prakash Sakpal sees 75 bps worth of hikes in Indonesia, 125 bps in Philippines and 100 bps in India by end-2019, including Thursday’s increases.

“This (Fed) tightening will likely prove too much for the rest of the world,” said Anna Stupnytska, global economist at Fidelity International.

“The Fed will have to strike a more cautious tone.”

The Hong Kong Monetary Authority moved in lockstep with the Fed as its currency is pegged to the greenback.

Graphic: Asian economic outlook (tmsnrt.rs/2OaS544)

GRAVITY PULL

For the stronger Asian economies, which are increasingly gravitating towards China on trade and investment, and away from the United States, the Fed outlook does not move the needle as much as it did during its previous tightening cycles.

South Korea’s central bank Governor Lee Ju-yeol said the Sino-U.S. trade conflict, as well as weakness in inflation and the job market weighed against policy tightening.

Taiwan left rates unchanged at 1.375 percent, while the Reserve Bank of New Zealand kept them at 1.75 percent, where they have been for the past two years, citing tepid inflation and the risk of a trade war.

Like most economies in Asia, New Zealand is now much more closely integrated with China than with the United States.

Worries that China’s economy is slowing and will further suffer from an intensifying trade row with Washington are therefore more relevant for most Asian economies’ interest rate outlook than the strength of the U.S. economy.

New Zealand now trades about twice as much with China than it does with the United States, a consequence of Beijing’s staggering growth over the last two decades.

When Lehman Brothers collapsed in 2008, triggering the global financial crisis, New Zealand traded with the United States 1.35 times more than with China.

“China’s economic outlook matters more than the U.S.,” said Mark Wills, who develops multi-asset strategies for institutional clients at State Street Global Advisors.

Graphic: New Zealand's trade with China and the United States (reut.rs/2N2HTGn)

ASIAN EMs STRONGER

China’s central bank skipped open market operations on Thursday, meaning it did not immediately adjust borrowing costs for interbank loans after the Fed hike. The People’s Bank of China stood pat in June, but raised rates slightly in March shortly after Fed’s move.

Despite the trade risks and slowing consumption, China is still seen growing at an impressive rate of around 6.5 percent this year. For Asian emerging markets, this is an advantage that they have over peers in Latin America and elsewhere.

That, coupled with less worrying current account deficits and stronger economic prospects, is likely to help Asia avoid the kind of tumult that has seen Argentina hike rates to 60 percent and Turkey to 24 percent this year.

“Asian central banks have been vigilant, and pre-emptive ... in running their monetary policies,” said Frances Cheung, head of Asia macro strategy at Westpac Banking Corporation.

“They gain credibility in this cycle.”

Reporting by Swati Pandey in Sydney and Vatsal Srivastava in Singapore; Writing by Marius Zaharia in Hong Kong; Editing by Shri Navaratnam

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