Asia FX outlook improves as hesitant Fed chains US dollar: poll

[BENGALURU] The outlook for emerging Asian currencies has brightened somewhat in recent months, as receding expectations of rapid rate hikes in the US restrain the US dollar and China's economy shows tentative signs of stabilising, a Reuters poll found.

While the consensus from more than 70 foreign exchange strategists polled over the past week was for most major Asian currencies to depreciate one to 3 per cent by this time next year, a few were even expected to make modest gains.

The Chinese yuan, Indian rupee, Thai baht and Indonesian rupiah are all expected to weaken less than previously thought over the coming year, while the Malaysian ringgit and Philippine peso are likely to strengthen from here.

Just three months ago, the wide-ranging view was that all the major Asian currencies would weaken in 12 months, some by almost 5 per cent, on risks of an imminent Federal Reserve rate hike and easy monetary policy by regional central banks.

But those forecasts for a steep path of US interest rates have evaporated after the Fed went through most of this year signalling a rate hike without actually delivering one.

Several analysts in the poll said the outlook for Asian currencies over the next six months is closely tied to the US dollar, especially ahead of and after the US presidential election in November.

"The US dollar remains significantly vulnerable in the aftermath of the Fed's decision to leave monetary policy unchanged in September," said Daniel Katzive, head of FX strategy at BNP Paribas.

"Fed officials continue to signal that further tightening is likely by the end of the year, but with the FOMC clearly data-dependent and sensitive to new risks emerging, we do not expect markets to rapidly increase pricing for a December move."

Fed Chair Janet Yellen said last month she expected one rate rise this year if the US job market continued to improve and major new risks did not arise, leading economists to price in a December move.

Financial markets are pricing in the likelihood of a December hike at just over 50 per cent. A follow-up increase currently carries just a one-in-three chance even as far out as September, compared with Fed officials whose most recent forecasts suggest two increases next year.

Coupled with hopes China's massive economy is stabilising in recent months after years of central bank and government stimulus, that will likely mean Asian currencies will fare better over the coming year, analysts said.

Activity in China's factories expanded again in September, according to an official survey last week, and industrial profits rose at the fastest pace in three years in August.

Economists, however, cautioned that growing dependence on government spending and a heated property market may pose risks to the world's second-largest economy.

The latest poll showed the closely-managed Chinese yuan will depreciate about 3 per cent from now until the end of Sept 2017, similar to the amount it has lost since January.

Still, the median forecasts from the latest poll are for it to ease to 6.86 per dollar by end-Sept, compared to 6.89 in the previous survey.

The yuan last traded at 6.6685 on Sept 30, the last working day before a week-long holiday in China.

The yuan, also known as the renminbi, was inducted into the International Monetary Fund's reserve basket, known as Special Drawing Rights (SDR), on Oct 1 - something analysts say will likely draw more foreign demand for the currency.

A separate Reuters poll last week showed sentiment toward most emerging Asian currencies had improved recently and bearish bets on the yuan were scaled down.

Several respondents in the poll also said the outcome of the US presidential election was pivotal to the prospects of emerging markets and their currencies.

"For emerging markets, our broad forecasts show stability versus the greenback over the next 12 months. However, a Trump presidency would likely be destabilising for emerging market FX based on his strong views on China, Mexico, and trade policy in general," analysts at Citi wrote in a recent note.

PROXY FOR ASIAN FX

The yuan is usually a proxy for other Asian currencies which trade heavily with China and influences their prospects.

That was reflected in the poll consensus, which showed the Indian rupee would weaken to around 67.73 a US dollar in a year from 66.66 on Thursday. In the last poll, the median 12-month consensus was 68.17.

The Reserve Bank of India's newly-minted Monetary Policy Committee unexpectedly cut lending rates on Tuesday to their lowest in almost six years, citing tepid inflation - a move that has raised the prospects of further rate cuts in Asia's third-largest economy.

The latest poll also showed the South Korean won would lose a little over 2 per cent from now until end-Sept 2017 to 1140 a US dollar, while the Indonesian rupiah is forecast to weaken 3 per cent to 13395 a US dollar.

Those forecasts were markedly stronger than the previous survey.

REUTERS