Asian currencies subdued after US inflation; set for weekly losses

BENGALURU (Jan 12): Asian emerging markets currencies languished on Friday as higher-than-expected inflation in the United States failed to deter March interest rate cut bets, keeping the greenback steady, with most currencies on track to end the week lower.

The Philippine peso edged 0.1% higher on Friday but logged a 0.7% decline over the week, set for its biggest weekly loss since late August last year. The Indonesian rupiah, on the other hand, slipped marginally and was on track for a second consecutive week of losses.

Equities in Manila and Thailand were the biggest gainers in the region for the day, jumping 0.8% and 0.3% respectively.

Overnight data from the United States showed consumer prices rose more than expected in December, suggesting the Fed may need to maintain high interest rates for a longer period. However the market continues to expect a rate cut soon, according to CME FedWatch tool.

The tool showed a 73% chance of a rate cut in March as of 0422 GMT, compared to a near 66% chance at the beginning of the week.

Robert Carnell, head of research and chief economist Asia-Pacific at ING, said “the market pricing simply looks wrong”.

“Without some sort of crisis somewhere — say a new banking collapse or some massive blow out of commercial real estate credit — I can’t see how the Fed can possible justify a cut by March,” Carnell said.

Analysts at Bank of America, however, maintained their view of a quarter-point rate cut in March, writing that a soft core personal consumption expenditure (PCE) index increases the likelihood of the first rate cut in March.

Separately, the US and Britain launched strikes against Houthi military targets in Yemen, after the Iran-backed group attacked international ships in the Red Sea, leading to a surge in oil prices and likely dampening investor sentiment. 

Meanwhile, data from China showed consumer prices extended their decline for a third month in December, while factory-gate prices also fell, highlighting the persistence of deflationary forces in the world’s second-largest economy.

Carnell added that China’s CPI data came in negative due to a “very unhelpful” comparison with food prices last year, coupled with some weakness in current gasoline prices which “reflects an economy that is weak, but not one that is in a deflationary doom-loop”.

The Chinese yuan and stocks in Shanghai were little changed on Friday.

Markets in Taiwan were barely changed ahead of a pivotal presidential and parliamentary election on Saturday, which is being closely watched internationally amid geopolitical tensions with China.

“Markets will likely focus on the extent of victory of the new president, the degree of power sharing needed in the Legislative Yuan between different parties, coupled with comments from the new president, especially on China relations,” MUFG wrote.

Back in Southeast Asia, the Thai baht has slipped about 1% so far this week, on track to record a second consecutive week of losses. Bangkok stocks also fell about 1% for the week, snapping a five-week winning streak.