Asian currencies edged higher on Monday as the dollar lost some of its shine as weak US wage growth tempered expectations for a spate of interest rate increases. The moves in Asian currencies were cautious, however, ahead of a US Federal Reserve meeting on March 14-15, at which the Fed is widely expected to raise interest rates. Investors' focus is now turning to how many more rate rises may be coming this year.
The South Korean won rose about 1 percent to 1146.4, pulling away from a five-week low of 1,161.2 per US dollar set on Friday. The Taiwan dollar and Thai baht both rose more than 0.3 percent. US job data released on Friday showed that US employers added 235,000 workers in February, exceeding the 190,000 hiring forecast among analysts polled by Reuters.
However, the outcome weighed on the dollar as there had been expectations of an even stronger figure, and as the data also showed that wages rose less than expected. Although the US job data has led to some buying back of Asian currencies, they appear vulnerable against the dollar in the near term, said Hirofumi Suzuki, an economist for Sumitomo Mitsui Banking Corporation (SMBC) in Singapore.
"The theme now is an acceleration of the pace of (Fed) rate hikes this year, and the risk seems to be tilted toward the selling of Asian currencies and dollar-buying," Suzuki said. One focus this week is whether Fed policymakers will revise up their interest rate projections in their so-called "dot plot". In the previous projections released in December, the Fed had signalled three interest rate hikes in 2017. The dollar could gain a boost if the Fed revises its dot plot higher, analysts at Maybank said in a research note.
"Should this shift in markets' expectation for a pick-up in momentum on Fed rate hike trajectory continue, we expect US dollar strength to be felt more on the Asians and commodity-linked currencies," the Maybank analysts wrote. Asian currencies that outperformed over the past two to three months such as the Taiwan dollar, South Korean won, Singapore dollar and Thai baht, against a backdrop of low market volatility may give back some of their earlier gains, they added.
Indian shares, bonds and rupee are likely to gain when trading resumes on Tuesday after a public holiday on Monday, as Prime Minister Narendra Modi's landslide victory in India's northern state of Uttar Pradesh is seen as an endorsement of his economic reform agenda. On Monday, India's NSE stock futures listed on the Singapore Exchange rose more than 2 percent. The rupee rose about 0.5 percent to 66.34 per dollar in offshore trading of one-month non-deliverable forwards. The victory by Modi's ruling Bharatiya Janata Party (BJP)strengthens his claim to a second term in national elections in 2019, and investors are betting it will embolden the BJP to embark on more reforms.
"This is likely to renew hopes toward Modi's administration going into 2019," said SMBC's Suzuki. There may be some relative value in India at a time when emerging markets in general are likely to face headwinds from the prospects for US monetary tightening, and also since the European Central Bank is seen getting closer to raising interest rates than before, Suzuki said.
The euro hit a one-month high against the dollar on Monday, following news that some European Central Bank policymakers have raised the possibility of raising interest rates before its bond buying programme ends. "India will probably remain firm for some time yet, among emerging market countries," Suzuki said. Indian bonds and equities attracted foreign inflows in February, with foreign interest in Indian debt returning after fourth months of continued selling, while Indian equities attracted net foreign investments of $1.48 billion.
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