SINGAPORE, Dec 17: The Indian rupee, Indonesian rupiah and Philippine peso underperformed their Asian peers on Tuesday as investors chose to be lightly positioned ahead of the outcome of the U.S. Federal Reserve’s meeting later in the week.
The rest of the emerging Asian currencies were flat and even losses in these three currencies were contained to about half a percent against the dollar as market participants waited for the Fed to possibly indicate the timeline for scaling back its monetary stimulus.
The odds still point to no major policy change when the Fed meets Dec. 17-18. But most of the recent U.S. Domestic economic data suggests the beginning of the end of the Fed’s massive bond-buying program is coming sooner than later, and Wednesday’s meeting could end some of the uncertainty over the timing and scale of stimulus-tapering.
Stock markets across Asia were broadly higher on Tuesday, recovering some of the previous day’s losses. Ten-year bond yields in Indonesia, India, Philippines and Korea — the region’s high-yielders — also showed no sign of stress heading into the Fed meeting.
Part of that was driven by a belief that a Fed decision to taper stimulus wouldn’t be a big surprise as when Fed Chairman Ben Bernanke first raised the prospect in May this year. The Fed chief’s comment helped trigger a heavy selloff and capital flight from Asian markets between May and September this year.
The other reason is conviction that the Fed will emphasise it intends to keep interest rates low for long, irrespective of when the quantitative easing programme is shelved.
Still, trading this week has been sluggish and analysts said they wouldn’t advise holding any kind of positions, even in currencies such as the Chinese yuan and Singapore dollar that are deemed less vulnerable to a turn in Fed policy.
‘No position is a good position,’ said Frances Cheung, strategist with Credit Agricole. ‘Although the market has expected the tapering, if there is any confirmation on that, there may still be some reaction with outflows from Asia.’
Traders said they were going into Wednesday’s Fed decision lightly positioned but would seek to get back into Asian currencies later in the week, either into a broad rally spurred by a dovish Fed or into specific Asian assets that would perform well as U.S. Policy tightens alongside improving global growth.
‘We would be looking for opportunities to sell dollar-Asia on a taper induced rally,’ said Dominic Bunning, a strategist at HSBC in Hong Kong.
‘We think there will be less fear surrounding the start of the tapering process, and with Asian growth likely to pick up on a seasonal basis into Q1 we would expect sentiment around Asian currencies to pick up in early 2014, before fading through the rest of the year.’
(AGENCIES)
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