Hawkish bets ebb in Asia as global recession fears spill over

TRADERS are dialling back rate hike bets in emerging Asia as growth concerns steadily overtake inflation angst.

Swaps in South Korea, Malaysia, India and Thailand have all been dropping since mid-June amid easing price pressures and concerns over spillover effects from stumbling growth elsewhere. This volte face followed the 3 months to June when an index of EM Asia bonds registered losses of 6 per cent, the largest since 2016, as inflation galloped to multi-year highs.

"Hawkish bets in EM Asia have been falling partially as a response to policy rates being overpriced on the way up," said Galvin Chia, an EM FX strategist at Natwest Markets in Singapore. "Global factors such as US rates rallying over the last few weeks has also played a major role."

How rate hike expectations have ebbed in South Korea, Malaysia, India and Thailand:

1. South Korea

Won swaps are pricing for the Bank of Korea to hike to nearly 2.75 per cent in the next 6 months, which appears to be the terminal rate of expectations as the 1-year swaps have also converged on the same level. In mid-June, the same 1-year swaps were pricing for rates to rise to 4 per cent.

Expectations for a shallower rate hike curve have been building, with a Bank of Korea board member warning last month that the pace of policy tightening may be tempered due to growing risks facing the domestic economy.

2. Malaysia

Traders have been betting on a less hawkish Bank Negara Malaysia since mid-June, with ringgit 1-year forward 1-day rates factoring for a cumulative 75 basis points of benchmark rate increases over the next 12 months to 3 per cent, down from expectations of 3.50 per cent in early June. This is in line with expectations for the policy rate to rise to 3 per cent by the second quarter of next year, according to a median of economist surveyed by Bloomberg.

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CGS-CIMB is projecting for Malaysia's gross domestic product growth to slow to 4.1 per cent in 2023, from an estimated 5.2 per cent this year, as the nation's external trade will feel the impact of the global slowdown, according to a Jul 25 note.

3. India

Rupee overnight indexed swaps are factoring rate increases of around 130 basis points over the 12-month horizon, which would bring the policy rate up to 6.20 per cent. This would be marginally higher than economist median expectations for the benchmark rate to be increased to 6 per cent by mid-next year.

In contrast, swaps were pricing for rate hikes of as much as 150 basis points on Jul 18.

Traders have been making less hawkish calls for the Reserve Bank of India as inflation showed signs of moderating. Retail price growth came in below estimates in May and June, after beating expectations in 4 straight months to April.

4. Thailand

Thailand's 1-year non-deliverable interest rate swap is factoring in at least 75 basis points of rate hikes over the next 12 months, with the swap currently at around 1.40 per cent, down from a 3-year high of 1.78 per cent in mid-June. A median of economists surveyed by Bloomberg forecast the policy rate to rise to 1 per cent by middle of next year.

Bank of Thailand meets on Aug 10 and is widely expected to hike at this decision. BLOOMBERG