Most Asian currencies edged lower on Thursday after the Federal Reserve raised its interest rates for the second time this year, and struck a more hawkish policy tone. The Fed raised its benchmark overnight lending rate a quarter of percentage point to a range of 1.75 percent to 2 percent, as expected, on the back of strong US economic growth. Fed policy makers projected two additional increases by the end of this year compared to one previously, based on board member's median forecast.
"We believe a rate hike in September is very likely given the hawkish forecasts," said Qi Gao, FX strategist at Scotiabank. "We remain bearish on the high-yielding INR and IDR as well as the PHP with twin deficits," he said. The South Korean won was the biggest loser among Asian currencies, shedding about 0.5 percent on Thursday.
South Korea's vice finance minister said the government is prepared for policy responses against any adverse impact from the Fed's rate rise and that capital outflows shouldn't be too big a concern just because of changes in interest rates. In a surprise for markets, the Chinese central bank resisted following in the Fed's path, leaving its borrowing costs for interbank loans unchanged. That decision came as China reported weaker-than-expected activity data for May that showed the economy is finally slowing under the weight of a prolonged crackdown on riskier lending.
"The pause in rate hike against the backdrop of rising default risk signals two things to us. First, the PBoC is likely to return to neutral stance to safeguard the bottom line of no financial risk after the recent data showed that structural de-leverage has taken effect," said Tommy Xie, economist at OCBC bank in a note. "Second, there is no urgency for China to maintain its favorable yield differential against the US as capital outflow and currency stability is no longer the key concern for China at the moment."
The Philippine peso eased 0.1 percent on concerns over high inflation, current account deficits and foreign outflows. The Thai baht also inched lower on the day. On the other hand, the Malaysian ringgit rose 0.2 percent, after declines in the previous two sessions. Investors were also watching out for the European Central Bank policy meeting on Thursday, in which policy makers could signal their intentions to start unwinding the ECB's massive bond purchasing programme.
Analysts say a hawkish tone by the ECB would hurt regional currencies more than the Fed's decision. "There is much less clarity on the ECB and thus more upside to the EUR," said Saktiandi Supaat, head of FX research at Maybank in Singapore, in a report. Data from Asian stock exchanges show foreigners are leaving the region's bond and equity markets this year as major central banks are tightening their monetary policies after many years of pump-priming their economies with easy money.
While these foreign outflows affect Asian markets, higher foreign exchange reserves and a reduction in current account deficits in many of the countries make them less vulnerable than during previous regional crises.
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