Analysis: Fed pause signal opens door for emerging markets in Asia

A teller counts Indonesian rupiah notes for a customer at a money changer in Jakarta, Indonesia, August 26, 2015. Indonesia’s central bank has urged exporters and businesses not to hoard foreign currency as part of its effort to maintain financial stability. 17-year low against the dollar. Reuters/Nimas Laula/

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  • Investors don’t see a repeat of the chaos of 2013
  • Asian financial markets react favorably to Fed hike
  • Falling inflation expectations will boost flows to EM Asia

SINGAPORE, July 28 (Reuters) – As the United States proceeds with its fastest interest rate hike in a generation, investors are unusually prepared to buy into emerging markets in Asia, betting executives capitalize on past cycles. -Can control inflation without triggering flight chaos. ,

While there is no rally going on, the stablecoin, debt and equity markets suggest investors have already stopped running for exits.

Beaten-down currencies such as South Korea’s won and Malaysian ringgit rallied on Thursday, and stock and bond markets in Seoul (.KS11)Kuala Lumpur (.klse)Jakarta and Manila (.psi) Reacted positively to the Federal Reserve’s latest rate hike.

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The Fed, which met market expectations with a 75 basis point (bp) increase overnight, has now raised rates by a total of 150 bps in two sittings – the fastest pace since the early 1980s.

Target Window for Benchmark Funds Rate (USFOMC = ECI) From the mid-2019 level of 2.25% to 2.5%. read more

But Chairman Jerome Powell noted slowing spending and production and foreshadowed an eventual slowdown in growth. Traders take this comment as confirmation that a peak in US interest rates is near and, with it, a top for the dollar and a trough for disappointment.

“Emerging market currencies, especially Asian currencies these days – from my point of view – have been oversold,” said Masafumi Yamamoto, chief currency strategist at Mizuho Securities in Tokyo.

“Given the rising US equity market and less-than-communication by Powell, it is supporting Asian currencies and other emerging market (EM) currencies, and the recovery of EM should continue.”

Belvedere markets in South Korea and Indonesia are indicating that the worst may be over. Instead of collapsing, benchmark 10-year bonds in Indonesia have remained relatively well: the yield premium on Treasuries has actually narrowed this year. ,

South Korea’s victory, which is battered by equity outflows on hopes that the country’s growth-exposed heavy industry and high-tech manufacturing sectors will suffer due to tighter conditions, has also stopped for breath.

After dropping nearly 9% for the year so far, won on Thursday headed for its best onshore session in nearly a month and has lifted nearly 2% from a 13-year low of mid-July.

“In six to 12 months’ time, when global inflation eases and the Fed’s tightening slows, it could benefit the won,” said Bank of Singapore strategist Moh Seong Sim.

waiting game

The move is a far cry from the start of the last Fed tightening cycle in 2013, when India and Indonesia were counted among the so-called “fragile five” emerging market countries with assets on the front lines of vulnerability to rising US rates.

Indonesian Stock (.jkse) They are on course not to fall again, at least not as they are on course for their best month since April, and the rupee’s currency has declined only 5% this year, even That greenback’s strength has propelled the US dollar index up nearly 11%. read more

In 2013, by contrast, Indonesia’s currency fell 21%, the 10-year yield rose 330 bps and stocks were flat as world equity markets rallied.

“What has pleasantly surprised us so far is that this time around, the Asian markets have actually put pressure on relatively well,” said Thu Ha Chow, head of fixed income for Asia at Dutch Property. Manager Robeco.

“We’re obviously, like everyone else, waiting for earnings … but high-quality corporates have been relatively stable.”

The risk is high, of course – especially as some central banks, particularly in Thailand and Indonesia, are being slow to follow in the Fed in raising interest rates.

No country raised policy rates (THCBIR=ECI), (IDCBRR = ECI) The pandemic lows, invite downward pressure on their currencies which in turn can increase inflation and outflows. However, investors expect the two to move on soon. read more

“When the tide is over and you’re still not doing the right thing and raising rates, all bets are off,” said Howe Chung Wan, Head of Asia Fixed Income at Principal Global Investors in Singapore. .

He expects inflation to break Bank Indonesia’s target band this year and force an interest rate hike sooner than policymakers intended. But, he said, if this happens in a market that is confident that global inflation can be contained, investors will gain confidence.

“This is where EM investors are going to be, when we exit the Fed, when we think inflation is peaking, that’s what we want to be.”

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Reporting by Rai V in Singapore and Harish Sreedharan in Bengaluru; Additional reporting by Cynthia Kim in Seoul; Written by Tom Westbrook; Editing by Bradley Perrett

Our Standards: Thomson Reuters Trust Principals.

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