As US economy heads for a soft landing, Asian currencies to rise against the dollar

ASIAN currencies and stocks rallied on Thursday (Jul 27), amid expectations that interest rates were close to their peak, after the US Federal Reserve hiked its target interest rate by another 25 basis points to between 5.25 per cent and 5.5 per cent.

Analysts now see Asian currencies rising against the US dollar, which fell after the Fed’s move.

The Federal Open Market Committee (FOMC) said on Wednesday it remained “highly attentive to inflation risks”, and would “continue to assess additional information and its implications for monetary policy”.

Fed chairman Jerome Powell said the central bank is no longer expecting a recession, easing concerns about the economic impact of fighting inflation. He did not rule out further rate increases, though.

Investors should remain cautious and stay diversified, said Kerry Craig, global market strategist at JP Morgan Asset Management. While US recession risks in the near term have faded, he noted they are still above the average level.

He is forecasting a narrowing rate differential between the US dollar and other economies – in particular, the Asian economies – and suggested that the latest round of hikes could be the last one this cycle.

“This may support the outlook for Asian equity markets and rates, as imported inflation is reduced as Asian currencies strengthen, and central banks across the region may contemplate their own path for rate cuts to support economic activity and domestic demand,” he said.

Expectations of a softer landing for the US dollar were also driven by market beliefs that a pause is on the cards, given the “sequential weakening in activity”, and a preference, indicated earlier, against having two consecutive hikes, said Ray Sharma-Ong, investment director for multi-asset investment solutions at asset manager Abrdn.

“We would also expect the US dollar to soften, driven by expected rate differentials moving against it, with the Fed tilted towards pausing, with other central banks like the Bank of England and the European Central Bank hiking,” he added.

The Hang Seng Index rose 1.4 per cent on Thursday; the Nikkei 225 Index rose 0.7 per cent; and the Korea Composite Stock Price Index (Kospi) expanded 0.4 per cent.

Stephen Innes, managing partner at SPI Asset Management, said he expects investors to position in and around potential stimulus in China.

“The messaging from China’s lawmakers represents a straightforward positive adjustment in macro policy stance, particularly in the property sector, in turn offering a much better basis for seeing a policy put limiting a deeper dive into the macro plunge tank,” said Innes.

In Singapore, the Straits Times Index gained nearly 1 per cent to 3,337.42 points. Indonesia’s IDX Composite slipped 0.7 per cent, while the FTSE Bursa Malaysia KLCI Index gained 0.1 per cent. Thailand’s SET Index gained 1.2 per cent.

Michael Kelly, global head of multi-asset at PineBridge Investments, was bullish on Asian high yields, on the grounds that they present “a compelling and longer-lasting opportunity to earn high carry with very low duration”.

Compared with US high yields, Asian high yields offered less breadth but with higher spreads, supported by improving credit fundamentals, he said.

The analyst also likes “select emerging market equities”, as he foresees these markets will benefit from increasing cash flows without resultant monetary restraint – a trend that should reverse the extreme caution priced into China as it relaxes regulatory and monetary policy.

This would all depend on the upcoming US data, though, which would signal if the fight against inflation is truly over.

“With the case for a September hike finely balanced, there could be bigger moves around any data surprise,” said analysts at HSBC. “The recent amplified reaction of the US dollar to a mild downside surprise on US CPI is perhaps a harbinger of the weeks ahead.”