Asian currencies gain on stronger prospects for Fed rate cut

Asian currencies gained against the dollar on Friday after dismal US factory data spurred speculation that the Federal Reserve could switch from raising to cutting rates before the end of the year, and on signs of progress in Sino-US trade talks. Survey data on Thursday showed US factory activity slowed more than expected in December, suffering the biggest drop since 2008 as the world's largest economy begins to lose steam.
Yields on two-year US Treasuries sank below 2.4 percent, reaching parity with the Fed key rate. While, three- and five-year yields were even lower, an inversion that sometimes heralded recessions in the past. Meanwhile, news that China and the United States would hold vice-ministerial level trade talks in Beijing next week further soothed risk-averse investors and boosted regional currencies.
OCBC Bank in a note to clients said that Asian currencies may respond to the weaker broad dollar complex with foreign investor interest proving supportive for regional asset markets. The Indian rupee was the second best performer in the region, strengthening 0.4 percent on Friday and was on track for marginal weekly gains. Also gaining against the dollar was the South Korean won and the Thai baht. The baht was in line to strengthen 1.5 percent this week, its sixth straight week of gains, however the won was poised to post a weekly drop of 0.7 percent.
Elsewhere, gains in the Malaysian ringgit were capped after government data showed the country's trade surplus in November plunged as exports lagged behind imports. The Philippine peso traded in a tight range as inflation in the archipelago cooled to a seven-month low in December, reinforcing expectations of a pause in interest rate tightening by the central bank. The Chinese yuan, the Singapore dollar and the Taiwan dollar were marginally firmer.
The rupiah gained as much as 1.05 percent to 14,255 on Friday, but had pared some gains by 0451 GMT. The currency was on track to firm nearly 2 percent this week. Indonesia's central bank plans to intervene in the domestic futures market to defend the rupiah, a official told Reuters earlier in the day.
This comes two days after Bank Indonesia's governor said he expects the rupiah's exchange rate to be more stable this year compared with 2018 as he is optimistic relations will improve between the United States and China.