Most currencies in emerging Asian markets rose on Wednesday as the dollar yielded some of its overnight gains, while equities in the region also advanced, as traders weighed the odds of an outsized rate cut by the US Federal Reserve later in the day.
Malaysian ringgit scaled to its highest level in more than 19 months, up 0.4% at 4.2370 per dollar.
The currency continued to build on its outperformance as a confluence of tailwinds including strong growth fundamentals and anticipation of Fed’s interest rate cuts boosted inflows.
The ringgit is “buoyed by expectations of a rapidly narrowing yield differentials with the US and global funds pouring into Malaysian equities and bonds,” said Lloyd Chan, senior currency analyst at MUFG.
Anticipation of a half-point rate reduction by the US Fed later in the day stood at 65%, substantially higher than 34% a week ago, according to CME FedWatch Tool.
With the Fed expected to cut rates by at least 75 basis points this year, the dollar has been pushed to the defensive, providing a much-needed breathing space for emerging markets and improving the allure of their assets.
Most Asian currencies logged a stellar performance in August, with the Philippine peso chalking up its best monthly gains in roughly 18 years.
Asian currencies: Malaysian ringgit and rupiah gains
However, the market seems to have overpriced a series of Fed rate cuts this year, said Ryota Abe, an economist at Sumitomo Mitsui Banking Corp, further stating that relief will not be “how much” the Fed cuts this time but “how deep” can it cut rates in this imminent easing cycle.
Abe said a quarter-point rate cut by the Fed will result in the Asian currencies being sold as the dollar may be bought back.
“In the short term, market participants will review chances for the Fed to deliver a 50bps rate cut soon as the current economic data do not necessarily support such large cuts, which will in turn lead to the resurgence of USD.”
Indonesia’s rupiah and equities treaded water ahead of a monetary policy decision later in the day. Bank Indonesia is expected to stand pat on its interest rate, a Reuters poll of 33 economists showed.
Elsewhere in Asia, the Singaporean dollar and the Thai baht added 0.2% each, while the Philippine peso inched 0.2% lower.
The Philippine central bank earlier in the day announced it was considering a substantial cut in the reserve requirement ratio (RRR) for banks this year.
Equities in emerging Asia were range-bound, with Malaysian benchmark down 0.6%, while stocks in Thailand and Indonesia were up and those in the Philippines added 0.6%.
In China, stocks were largely flat after trading resumed following the Mid-Autumn Festival break.
Markets in South Korea were closed for a public holiday.