Asian FX weaken ahead of Fed, Philippine peso at record low

Asian FX weaken ahead of Fed, Philippine peso at record low

THE Philippine peso sank to a record low and other Asian currencies fell against the greenback on Wednesday ahead of a Federal Reserve interest rate decision that is likely to determine the direction of financial markets for months.

Equities across Asia also lost ground, with shares in Manila falling 1.4% to lead losses among regional peers, as investors braced for an expected hefty interest rate hike from the Fed.

The U.S. central bank is set to announce its decision on Wednesday at the end of a two-day policy meeting.

Rate futures traders are pricing in an 81% chance of a 75 basis point hike and a 19% probability of a 100 bps of tightening.

The dollar hovered near a two-decade peak against a basket of currencies, after yields on U.S. Treasury notes, a rough gauge of interest rate expectations, leaped ahead of the Fed decision.

Rising yields strengthen the dollar, increasing the appeal of Treasury notes and the greenback, in turn weighing on riskier Asian assets.

Asia-focused investors this week also await policy decisions from central banks in Indonesia, Taiwan, the Philippines and Japan.

While central banks in Indonesia, Taiwan and the Philippines are likely to raise rates, the Bank of Japan is expected to stick to its dovish monetary policy despite the yen’s steep decline.

The peso declined 0.1%, while the Taiwanese dollar and Indonesian rupiah lost 0.2% each. The Japanese yen, which has fallen nearly 3.4% so far this month, was down 0.2%.

“Foreign investors in the Philippines equity markets have been selling off their holdings, and these heavy outflows have been the main contributor to the peso’s exasperated weakness recently,” said Alvin Tan, head of Asia FX strategy at RBC Capital Markets.

The expected half-point interest rate hike on Thursday by Bangko Sentral ng Pilipinas (BSP) is unlikely to alleviate any pressure on the ailing peso, Tan said.

He noted the central bank has been hiking rates since the first quarter and “it’s not going to help the peso because there is a bigger macro backdrop that is driving the U.S. dollar higher.”

Among equities in the region, shares in Kuala Lampur and Mumbai declined 0.4% each, while shares in Jakarta fell 0.9% to a three-week low.


** South Korea’s central bank denied a media report that a currency swap arrangement with the U.S. Federal Reserve would be announced as early as this week

** Indonesian 10-year benchmark yields are down 0.4 basis points at 7.194%​​ – Reuters