Asian FX rise as yuan firms, equities decline on US rate, China fears

EMERGING Asian currencies tracked gains in China’s yuan on Friday, after its central bank set the daily fixing much higher than expected, while equities fell on worries over the ailing Chinese economy and prospects of higher-for-longer U.S. rates.

The South Korean won and the Singaporean dollar appreciated 0.3% and 0.1%, respectively.

Malaysia’s ringgit gained 0.2% but was on track for its worst week in nearly two months. Data on Friday showed that the country’s economic growth hit the lowest in nearly two years in the second quarter, prompting the Bank Negara Malaysia to warn that full-year growth will come in at the lower end of its previous forecast of 4%-5% range.

ALSO READ: Malaysia’s economy grows 2.9% in 2Q 2023 as slower external demand weighs

Other data showed Malaysia’s exports in July slumped 13.1% from a year earlier, worse than economists forecast.

“Our base case is for no further policy rate hikes, though we note the risk of another 25bp move,” Barclays analysts wrote in a note.

The Philippine peso, which hit its lowest level since November on Monday, added 1%. It is set to post its first weekly gain in five.

The Philippine central bank left its benchmark interest rate steady at 6.25% for a third straight meeting on Thursday. Bangko Sentral ng Pilipinas (BSP) Governor said it has room to resume hiking interest rates without contracting the economy.

Analysts at DBS noted that most of the regional central banks have “preferred to err on the side of caution” and kept rates on hold into the second half of the year.

“U.S.-ASEAN-6 rate differentials have narrowed significantly in this cycle as the regional central banks have not kept up with the pace of U.S. rate adjustments, leaving the currencies (and debt portfolio flows) vulnerable to volatility in the U.S. dollar/UST movements,” they wrote.

The dollar index eased on Friday but was headed for a fifth winning week.

Meanwhile, the People’s Bank of China set the midpoint rate firmer than the previous fix and more than 1,000 pips stronger than Reuters’ estimate – the largest deviation from market estimates seen this year.

The yuan, which added as much as 0.4% earlier in the session, was last trading flat. Thailand’s baht edged 0.2% higher but was set for a third consecutive weekly decline.

Thailand’s Pheu Thai Party gained support from a rival military-backed party, potentially boosting it in its bid to form a government ahead of a prime ministerial vote in parliament next week.

Bucking the trend, Indonesia’a rupiah fell 0.2% and was set for a fifth straight weekly loss.

Markets are hoping for further monetary easing in China after a recent run of weak data highlighted the country’s faltering economic recovery, while strong data from the U.S. this week, particularly retail sales, bolstered the case for additional tightening by the Federal Reserve.

Equities in the region declined, with those in Manila, Jakarta, Singapore and Seoul down between 0.4% and 1.2%.

China’s decision on loan prime rate, the Bank of Korea and Bank Indonesia’s policy decision and July inflation data from Singapore and Malaysia will be on investors’ radar next week.

HIGHLIGHTS

** China Evergrande filed for protection from creditors in a U.S. bankruptcy court

** A Reuters poll found Thai economy likely grew 3.1% in Q2 on higher tourist arrivals

** Japan’s core inflation eases, bolstering view BOJ will stand pat – Reuters