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Asia-Pac Takes a Hit as Fed Sticks to Guns on Rate Hike, Balance Sheet Normalization

Currencies in the Asia-Pacific region fell against the US dollar on Thursday morning after the Federal Reserve signaled that it would raise interest rates again this year and would begin shrinking its balance sheet in October. The Fed funds rate was left unchanged at its current range of 1–1.25%.

Although the majority of economists had expected this would be the Fed’s position, for some, doubt had crept in following hurricanes Harvey and Irma.

Addressing the economic impact of recent hurricanes, the FOMC had this to say in Thursday’s prepared statement (Wednesday in the US):

“Storm-related disruptions and rebuilding will affect economic activity in the near term, but past experience suggests that the storms are unlikely to materially alter the course of the national economy over the medium term.”

USD/JPY 3 Month Chart

On interest rates, Fed Chairwoman Janet Yellen said that “gradual increases [were necessary] to sustain a healthy labor market and stabilize inflation around our 2 percent longer-run objective.”

New Fed projections show that eleven of sixteen Fed officials now take the view that a 1.25–1.5% Fed funds range is most appropriate by year-end. Derivatives markets have therefore moved to price in a 70% probability of a quarter-point hike by the Fed at its December meeting.

The Fed is predicting “ongoing strength” in the US economy and will work down its balance sheet because “stimulus is no longer needed.”


Asia-Pac Currencies Fall Post-FOMC

AUD/USD had tested 0.81 shortly before the Fed’s announcements. It fell by 1.3% in the hours following and was last seen on Thursday at 0.7999.

USD/JPY climbed 1.2% and above 112 for the first time since July. A post-FOMC high of 112.64 marked the yen’s weakest level in two months. Japan’s currency was unmoved by the Bank of Japan’s own meeting on Thursday morning, at which interest rates and the bank’s asset purchase program were left unchanged.

The Chinese yuan fell to a three-week low against the dollar, with USD/CNY now at rates close to 6.6.

Like the Australian dollar, the New Zealand dollar was strong heading into FOMC. It had climbed to a six-week high of 0.7433 after benefitting from a new poll which showed the incumbent National Party leading ahead of New Zealand’s general election on Saturday. NZD/USD has since fallen by 1.3% to 0.7335.

USD/JPY 3 Month Chart

USD/PHP rose post-FOMC by 0.4% to 51.05. There is some uncertainty ahead of Thursday’s meeting of the Bangko Sentral ng Pilipinas, with some economists predicting a move by the bank to hike its interest rate from its current level of 3%. Such economists argue that the Philippine peso’s significant deprecation against its regional peers this year (the peso has lost 10% against the Thai baht and 9% against the Singapore dollar) and improved credit growth warrant raising the cost of borrowing. The decision is set for 4pm in Manila; 8am GMT.

Taiwan’s central bank also meets. The Central Bank of the Republic of China (Taiwan) is widely expected to maintain interest rates at 1.375%. The Taiwan dollar has been the strongest Asian currency following the Fed’s announcements, weakening only 0.1% against USD to a rate of 30.16. Taiwan’s decision on rates, like that of the Philippines, will be announced at 4pm local time; 8am GMT.

USD/INR’s climb to 64.72 marked a fifteen-week low in the Indian rupee. The pair has since fallen back to 6.60 – a 0.3% increase on pre-FOMC levels.

USD/KRW climbed nearly 0.5% to 1131. The pair has spent the last two weeks trapped within a 10-point range between 1126 and 1136.

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Categories: AUD, CNY, INR, JPY, KRW, Markets, NZD, PHP, TWD, USD
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