May 5 (Reuters) – Currency traders should anticipate a growing number of interventions to curtail dollar strength against emerging market currencies and also the consequences of those which will likely support dollar against major currencies. nL2N2WX0IG
The dollar has surged putting pressure on several Asian currencies where some central banks have responded by talking about the likelihood of intervention. Inevitably they will sell.
South Korea’s central Bank and Hong Kong’s monetary authority are likely to be among the first to intervene but it’s unlikely they’ll be the last.
USD/HKD is pushing the upside limit of its trading bands, and USD/KRW has soared in part due to South Korea’s dependence on energy imports.
India, China, the Philippines, Singapore, Thailand and Taiwan also import energy, and with prices surging again, pressure on their currencies will mount. nL2N2WW0H8
Interventions that emerge to counter a dollar rally are usually rebalanced as most Asia nations are loathe to see FX reserves depleted. That means dollars are bought back, usually versus liquid majors which predominantly means euro, but also yen and sterling.
MANILA, May 5 (Reuters) – Philippine annual inflation jumped to 4.9% in April, surging beyond this year’s 2%-4% target band, due mainly to increases in energy and food prices, the statistics agency said on Thursday.
The headline figure was stronger than the median forecast of a 4.6% increase in a Reuters poll, and near the top end of the central bank’s projected range of 4.2% to 5.0% for the month.
(Reporting by Neil Jerome Morales and Enrico dela Cruz. Editing by Ed Davies)
May 5 (Reuters) – Traders in Asia have rushed to buy dollars, establishing short positions for every currency in a Reuters poll, but this is likely the start of a run on emerging market currencies. nL3N2WX0H2
There is a recipe for a big sell-off. The Federal Reserve is tightening monetary policy substantially and a policy that increasingly supports dollar will intensify demand for it.
Simultaneously China is experiencing a rapid slowdown in economic activity with yuan tumbling and where China’s currency goes, other Asia currencies follow, as most nations export and the drive to compete has long encouraged these countries to purse policies that support their exporter sectors.
The timing is also bad as most emerging market currencies have been elevated by the stimulus that was deployed to mitigate the impacts of the COVID-19 pandemic. They have a long way to fall to correct those gains, let alone factor the negatives stemming from a withdrawal of stimulus that is happening much faster than most traders expected.
May 5 (Reuters) – Asian equities saw massive foreign capital outflows in April on expectations of a hawkish policy by the US Federal Reserve and concerns over the impact of China’s lockdowns on regional growth.
Overseas investors offloaded Asian equities worth USD 14.22 billion in their fourth straight month of net selling, Refinitiv data for stock exchanges in Taiwan, India, South Korea, the Philippines, Vietnam, Indonesia and Thailand showed.
The region’s combined net foreign selling during January to April stood at USD 45.76 billion, the most in the first four months since at least 2008.
Analysts said a rise in expectations for aggressive monetary policy tightening in the United States, and lockdowns in China, impacting regional businesses, kept investors on the sidelines in April.
“Rate-sensitive growth stocks are seeing greater pressure from the discounting of future earnings, which may translate to wider outflows in Taiwan and South Korea,” said Jun Rong Yeap, a market strategist at IG.
Taiwanese, South Korean and Indian equities saw foreign outflows of USD 8.86 billion, USD 4.97 billion and USD 2.24 billion, respectively.
Rising inflation also remained a key investor concern in South Korea and India, Alicia Garcia Herrero, chief Asia Pacific economist at Natixis said.
South Korea’s consumer inflation hit a more than 13-year high in April. Meanwhile, the Reserve Bank of India raised its key lending rate by 40 basis points this week, to tame surging retail prices.
However, Indonesian, Thai and Vietnamese equities witnessed foreign inflows of USD 1.57 billion, USD 289 million and USD 175 million respectively in April.
“Southeast Asia markets are gaining traction as the region offers best growth potential,” said Suresh Tantia, senior investment strategist at Credit Suisse.
“In fact, the region is expected to deliver superior earnings growth than its North Asian peers as it benefits from post-pandemic recovery, higher commodity prices and still accommodative central banks.”
(Reporting by Gaurav Dogra in Bengaluru; Editing by Vinay Dwivedi)
WASHINGTON (Reuters) – The Federal Reserve on Wednesday raised its benchmark overnight interest rate by half a percentage point, the biggest jump in 22 years, and the U.S. central bank’s chief made an appeal to Americans struggling with high inflation to be patient while officials take the hard measures to bring it under control.
In a widely expected move, the Fed set its target federal funds rate to a range between 0.75% and 1% in a unanimous decision, and Fed Chair Jerome Powell said policymakers were ready to approve half-percentage-point rate hikes at upcoming policy meetings in June and July.
The level of specificity – effectively announcing Fed rate hikes in advance – was unusual, but reflected Powell steering a course between high inflation that requires a strong Fed response, and trying to avoid the sort of overkill that might tip the economy into recession.
In a news conference after the release of the Fed’s policy statement, Powell explicitly ruled out raising rates by three-quarters of a percentage point in a coming meeting, a comment that triggered a stock market rally.
But he also made clear the rate increases the Fed already has in mind were “not going to be pleasant” as they force Americans to pay more for home mortgages and auto loans, and possibly dent asset values.
The Fed also said it would start next month to reduce the roughly USD 9 trillion stash of assets accumulated during its efforts to fight the economic impact of the coronavirus pandemic as another lever to bring inflation under control.
“It’s very unpleasant,” Powell said of the impact on households of inflation, which is running about three times the Fed’s 2% target. “If you’re a normal economic person, then you probably don’t have … that much extra … to spend and it’s immediately hitting your spending on groceries … on gasoline on energy and things like that. So we understand the pain involved.”
STABLE PRICES
Powell told reporters that he and his Fed colleagues were determined to restore price stability even if that meant steps that would lead to lower business investment and household spending, and slower economic growth. The implications of inflation getting out of hand, he said, were worse.
“In the end, everyone is better off … with stable prices,” Powell said.
Still, Powell said he felt the U.S. economy is performing well, and strong enough to withstand the coming rate increases without being driven into recession or even seeing a significant rise in unemployment.
Despite a drop in gross domestic product over the first three months of this year, “household spending and business fixed investment remain strong. Job gains have been robust,” the central bank’s Federal Open Market Committee said in its policy statement.
Officials sharpened their description of the risks for elevated inflation to persist, especially with factors that have arisen since the start of the year, including the war in Ukraine and new coronavirus lockdowns in China.
“The Committee is highly attentive to inflation risks,” the Fed said in language analysts interpreted as a sign of the Fed’s commitment to push interest rates as high as needed to get inflation, and the expectations surrounding its future path, back to the 2% target.
BALANCE SHEET REDUCTION
The statement said the Fed’s balance sheet, which soared to about USD 9 trillion as the central bank tried to shelter the economy from the pandemic, would be allowed to decline by USD 47.5 billion per month in June, July and August and by up to USD 95 billion per month starting in September.
Policymakers did not issue fresh economic projections after this week’s meeting, but data since their last gathering in March have given no definitive sense that inflation, wage growth, or a torrid pace of hiring had begun to slow.
U.S. stock markets jumped following the announcement, extending gains after Powell poured cold water on the idea of hiking rates by three-quarters of a percentage point. The S&P 500 index closed about 3% higher, notching its biggest one-day percentage gain in nearly a year.
Yields on government bonds fell sharply in volatile trading while the dollar weakened against a basket of major trading partners’ currencies.
“This one has been well communicated and well delivered,” said Simona Mocuta, chief economist with State Street Global Advisors. “There is an awareness that they are tightening into a slowing economy and there are risks associated. For the magnitude of the move it has been very uneventful, and that is a good thing.”
(Reporting by Howard Schneider; Additional reporting by Saqib Ahmed and Chuck Mickolajczak in New York; Editing by Paul Simao)
NEW YORK, May 4 (Reuters) – U.S. stocks rallied and Treasury yields fell on Wednesday after the Federal Reserve raised interest rates by 50 basis points as expected and said it would begin to reduce its balance sheet in June in a decision seen as less hawkish than some feared.
The U.S. central bank set its federal funds rate to a range between 0.75% and 1% in a unanimous decision that gave the benchmark overnight rate its biggest bump in 22 years.
There was little initial reaction to a policy statement that mostly met expectations. But when Fed Chair Jerome Powell said the Fed was not “actively considering” a 75 basis-point rate hike, stocks rallied and bond yields reversed earlier gains.
“The key turning point was when he said they were not actively considering 75 bps,” said Brian Jacobsen, senior investment strategist at Allspring Global Investments.
“At worst, the Fed wants to meet market expectations. At best, they want to go slower or lower than what the market was pricing,” he said.
The dollar index fell 0.86% and the euro rose 0.89% to $1.0614, while the yield on 10-year Treasury notes fell 3.1 basis points to 2.927%.
Risk assets rallied, causing the U.S. dollar to “soften a touch, a classic ‘buy the rumor, sell the fact’ trade, while also sparking demand for Treasuries,” said Michael Brown, head of market intelligence at Caxton in London.
“Although hawkish in its own right, the decision is somewhat dovish compared to the market’s lofty expectations,” he said.
MSCI’s gauge of stocks across the globe closed up 1.67%. On Wall Street, the Dow Jones Industrial Average rose 2.81%, the S&P 500 gained 2.99% and the Nasdaq Composite added 3.19%.
Stocks closed lower in Europe on disappointing earnings and investor uncertainty before the Fed’s decision. The pan-European STOXX 600 index dropped 1.1%, with retailers leading sector losses, and major regional indexes also fell.
Germany’s 10-year government bond traded near multi-year highs, hitting its highest yield since June 2015 at 1.036%, after European Central Bank board member Isabel Schnabel said a rate hike in July was possible.
Overnight in Asia, many Chinese and Japanese stock markets were closed.
Oil prices rose about 5% as the European Union, the world’s largest trading bloc, spelled out plans to phase out imports of Russian oil, offsetting demand worries in top importer China.
European Commission President Ursula von der Leyen proposed a phased oil embargo on Russia over its war in Ukraine, as well as sanctioning Russia’s top bank, in a bid to deepen Moscow’s isolation.
U.S. crude futures gained $5.40 to settle at $107.81 a barrel and Brent settled up $5.17 at $110.14.
Gold bounced higher after Powell flagged risks to the economy from soaring inflation. Earlier, U.S. gold futures settled down 0.1% at $1,868.8 an ounce.
The global monetary tightening cycle has reached a symbolic milestone, with yields on German, British and U.S. 10-year government debt topping 1%, 2% and 3% respectively, levels not seen in years. That in turn has raised borrowing costs for businesses and households.
The Bank of England is expected to lift British rates on Thursday by a quarter of a percentage point, which would be its fourth hike in a row to quell surging prices.
US dollar and treasury
The Aussie dollar gained as much as 1.3%, and local shares fell, after the Australian central bank’s bigger-than-expected 25 basis-point rate increase on Tuesday.
Bitcoin rose 5.68% to $39,871.90 after earlier trading lower.
(Reporting by Herbert Lash in New York Additional reporting by Saqib Ahmed and Chuck Mikolajczak in New York and Huw Jones in London Editing by Alex Richardson and Matthew Lewis)
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