Asia inflation surge fueled by currency rout that's already gone

[SYDNEY] The past week's surprising pickup in Asia-Pacific inflation gauges may be fleeting.

The New Zealand dollar jumped to a three-month high on Tuesday after a central bank index of price-pressure expectations climbed to the highest since 2015.

That came after January inflation readings for South Korea, Indonesia and Thailand exceeded expectations. Philippine price gains accelerated too, though by less than economists had been expected.

A key question is how much of the price gains can be traced back to last quarter's foreign-exchange rout, with every major Asian currency weakening against the dollar in the three months through December.

This year's recovery in local exchange rates, along with a plateau in crude oil markets, raises the prospect consumer price gains will slow as a result.

"There's some inflationary pressure from weaker domestic currencies in recent data, along with rising oil prices," Koji Fukaya, chief executive officer of FPG Securities in Tokyo, said in an interview. "As the dollar pares some of its gains this month, that part of inflationary pressure will be reduced from here."

A stronger US dollar can feed inflation both by driving up the price for imported goods, and by boosting incomes for exporters - adding to the money that can be spent locally.

New Zealand is another example. Inflation expectations there have tended to accelerate soon after the local currency slumps, as the locals face higher prices for things they don't make at home, like cars and computers, and get more money from the products they send abroad, led by dairy products.

With the exception of the kiwi, markets haven't been shaken up by the trend. After all, the story of 2017 so far has been a recovery in bonds as the global reflation trade spurred by Donald Trump's US presidential win has ebbed with the rising tide of political uncertainty emanating from Washington to Europe.

Investors in most Asian markets don't expect much of a response from central banks. Malaysia and Thailand rate swaps have shifted up since the end of 2016, but peers in Australia, New Zealand and India have moved down and South Korea's curve is still pricing no hikes for at least a year.

That may be partly because all emerging Asian currencies except the Philippine peso have climbed at least 0.7 per cent versus the dollar in 2017, with the won surging more than 5 per cent to lead the group. The Aussie and the kiwi are also each up more than 5 per cent. That sort of flip flop may see a reversal in inflation in the coming months.

BLOOMBERG