Most emerging Asian currencies and bonds fell on Wednesday, hurt by a top US Federal Reserve official's support for an interest rate hike and concerns over a potential reduction in stimulus by the European Central Bank. South Korea's won also hit a two-week low as foreign investors sold local stocks and bonds after higher-than-expected inflation data, which is likely to discourage the central bank from easing interest rates further anytime soon.
The Philippine peso hovered near a seven-year low on concerns that the economy may slow down while inflation jumped. Malaysia's ringgit and Thailand's baht slumped as most bonds prices of those countries slid. Richmond Federal Reserve President Jeffrey Lacker said on Tuesday there was a strong case for raising interest rates, arguing that borrowing costs might need to rise significantly to keep inflation under control.
Bloomberg reported the ECB would probably wind down its 80-billion-euro ($90 billion) monthly bond purchases gradually before ending its quantitative easing programme, citing unidentified officials at euro zone countries' central banks. The ECB's decision-making body has not discussed reducing the pace of its monthly bond buying, ECB media officer Michael Steen later tweeted. US Treasury yields jumped to near two-week highs after the report.
Such tapering could undermine investors' appetite for higher-returns in emerging Asia, which has been supporting regional currencies and bonds. "A loss of confidence in the persistent availability of cheap liquidity will introduce an additional risk premium not only into yield curves but across asset classes funded by such cheap liquidity," Citi Research wrote in a note.
"In EM Asia, we judge the markets most at risk from a positioning & correlation shock to be Indonesian bonds and Korean and Thai rates, and IDR, TWD and KRW on the currency side." The won opened down 0.8 percent at 1,117.0 per dollar, its weakest since September 21. South Korea's annual inflation in September accelerated to its highest in seven months on recovering consumption. While the 1.2 percent rise in consumer prices was modest, it exceeded estimates and dampened hopes of a rate cut, which many analysts had been expecting soon.
The won recovered much of its earlier losses on the dollar's retreat in Asia and exporters' demand for settlements. The unit is seen having a chart support at 1,118.6, the 76.4 percent Fibonacci retracement of its appreciation in late September, analysts said. The peso fell 0.3 percent to 48.38 per dollar. That compared with 48.50 hit on September 30, the weakest since September 2009.
Consumer inflation in the Philippines accelerated to an 18-month high in September, but the central bank said there was no need to change its monetary policy stance. The Philippine currency pared earlier losses as foreign investors bought Manila stocks, but investors stayed bearish on a row between President Rodrigo Duterte and traditional ally the United States over his war on drugs.
"Although domestic policymakers have argued that currency swings are centred on Fed rate uncertainty, the recent weakness in the peso is above and beyond that seen elsewhere in the region," said Dwyfor Evans, managing director, head of APAC macro strategy at State Street Global Markets in Hong Kong. "It all points to heightened domestic political risk." The Philippine central bank Deputy Governor Diwa Guinigundo last week said uncertainty US monetary policy caused portfolio outflows.