Asian FX weaken as Fed rate hike looms, Philippine peso hits record low

September 21, 2022 - 5:53 PM
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BusinessWorld file photo of Philippine peso bills.
  • Markets eye Fed rate decision
  • Rising US Treasury yields, dollar weigh on Asian FX
  • China’s yuan touches 26-month low

The Philippine peso hit a record low against the dollar on Wednesday, as most other Asian currencies fell ahead of a U.S. Federal Reserve interest rate decision that would set the pace of financial markets for months.

China’s yuan <CNY=CFXS> weakened to a 26-month low, as investors braced for an expected hefty interest rate hike from the Fed.

Asian stocks also lost ground, with Manila’s benchmark index <.PSI> dropping more than 2% to lead losses among regional peers, while shares in Kuala Lampur <.KLSE> and Mumbai <.NSEI> declined 0.8% each and Jakarta equities <.JKSE> fell 0.9% to a three-week low.

The U.S. central bank is set to announce its rate decision later in the day, with rate futures traders pricing in an 81% chance of a 75 basis point hike and a 19% probability of a 100 bps tightening. <FEDWATCH>

The dollar hovered near a two-decade peak against a basket of currencies, after yields on U.S. Treasury notes, a rough gauge of rate expectations, leaped ahead of the Fed decision. [USD/][US/]

Rising yields strengthen the dollar, increasing the appeal of Treasury notes and the greenback, in turn weighing on riskier Asian assets.

Investors in Asia also await policy decisions from central banks in Indonesia, Taiwan, the Philippines and Japan this week.

While the central banks in Indonesia, Taiwan and the Philippines are likely to raise rates, the Bank of Japan is expected to stick to its dovish monetary policy despite the yen’s steep decline <JPY=>.

The peso <PHP=> declined 0.8%, while the Taiwanese dollar <TWD=TP> and Indonesian rupiah <IDR=> lost 0.3% and 0.2%, respectively. The Japanese yen <JPY=>, which has fallen nearly 3.4% so far this month, was trading flat.

“Foreign investors in the Philippine equity markets have been selling off their holdings, and these heavy outflows have been the main contributor to the peso’s exasperated weakness recently,” said Alvin Tan, head of Asia FX strategy at RBC Capital Markets.

The expected half-point interest rate hike on Thursday by Bangko Sentral ng Pilipinas (BSP) is unlikely to alleviate any pressure on the ailing peso, Tan added.

He said the central bank has been hiking rates since the first quarter and “it’s not going to help the peso because there is a bigger macro backdrop that is driving the U.S. dollar higher.”

Elsewhere, Taiwan’s central bank recently agreed to allow several large life insurance companies to remit overseas investment income, hoping to stem the depreciation of the local dollar, four sources with knowledge of the matter told Reuters.

Highlights:

  • South Korea’s central bank denied a local online media report that a currency swap arrangement with the U.S. Federal Reserve would be announced as early as this week
  • Indonesian 10-year benchmark yields <ID10YT=RR> up 0.2 basis points at 7.2%
Asia stock indexes and currencies at 0708 GMT
COUNTRYFX RICFX DAILY %FX YTD %INDEXSTOCKS DAILY %STOCKS YTD %
Japan<JPY=>+0.17-19.79<.N225>-1.22-5.01
China<CNY=CFXS>-0.46-9.86<.SSEC>-0.17-14.36
India<INR=IN>-0.22-7.00<.NSEI>-0.711.93
Indonesia<IDR=>-0.20-5.06<.JKSE>-0.708.58
Malaysia<MYR=>-0.18-8.76<.KLSE>-0.53-7.29
Philippines<PHP=>-0.73-12.06<.PSI>-1.66-10.96
S.Korea<KRW=KFTC>-0.34-14.73<.KS11>-0.87-21.17
Singapore<SGD=>-0.32-4.61<.STI>0.064.65
Taiwan<TWD=TP>-0.33-11.96<.TWII>-0.86-20.83
Thailand<THB=TH>-0.55-10.22<.SETI>0.01-1.14

Reporting by Riya Sharma in Bengaluru; Editing by Rashmi Aich