Most Asian FX, stocks fall on rates outlook volatility

BENGALURU (Jan 16): Most Asian currencies and stocks fell on Tuesday, with the South Korean won leading the losses, pressured by a stronger US dollar, as investors continued to gauge the path of interest rates in the world’s largest economy.

The MSCI emerging markets currency index fell more than 0.3% to trade near a one-month low.

An unexpected drop in US producer prices in December reinforced the view that rate cuts by the Federal Reserve could come as soon as March.

Markets are now pricing in a 70% chance of a 25-basis-points cut in March, versus 63% a week earlier, the CME FedWatch Tool showed.

European Central Bank officials on Monday pushed back on expectations on slashing interest rates, with Bundesbank president Joachim Nagel saying it was too early to discuss cuts. 

“We continue to stay wary of the risk that DXY may inch up higher amid risks of some fine-tuning in the aggressive Fed rate cut bets,” analysts at Maybank wrote.

Market participants now await Fed governor Christopher Waller’s speech later on Tuesday, who shifted from his traditionally hawkish stance in November.

Investors were also cautious on the uptick in Brent crude prices after Middle East tensions escalated, leading to a spike in shipping rates between Asia and Europe, which may add to existing inflation woes.

Back in Asia, the South Korean won slumped as much as 0.9% to hit its lowest since early November. The third consecutive session of fall brought the currency’s losses to more than 3% since the start of 2024.

Geopolitical cracks have further spread, with tensions rising between North Korea and South Korea, with the former’s leader Kim Jong Un calling for the South to be seen as the “primary foe”.

Other Asian units such as the Thailand baht, Philippines peso, Malaysian ringgit and the Singapore dollar slipped between 0.1% and 0.5%.

The Taiwan dollar extended losses for a third consecutive session, falling about 0.6%, after the Democratic Progressive Party’s candidate Lai Ching-te won the presidency for the third consecutive term, even as the party lost parliamentary majority.

Analysts at both DBS and Saxo Markets, however, expect stability to return for North Asian currencies like the South Korean won and the Taiwan currency, as geopolitical risks remain contained, while an upturn in the semiconductor cycle is extended further.

Among Asian equities, Seoul, Taipei and Bangkok fell between 0.2% and 1.1%. Jakarta and Mumbai were the only outliers in the region, with their shares rising about 0.4% and 0.1%, respectively.