Asian currencies had their steepest weekly loss in nine months after the Federal Reserve increased its 2015 interest-rate forecast and China doubled the yuan’s trading band.
The Fed, while indicating this week that the target rate will stay at zero to 0.25 percent in 2014, said it may reach 1 percent by the end of 2015, higher than 0.75 percent predicted previously. The yuan completed a record five-day drop as China’s central bank cut the daily reference rate to the lowest since November, almost a week after it increased the maximum limit the currency can diverge from the fixing to 2 percent.
“The U.S. rate outlook doesn’t look good for emerging-market currencies, including regional currencies,” said Saktiandi Supaat, Singapore-based head of foreign-exchange research at Malayan Banking Bhd. “With the yuan band widening, the Chinese are trying to remove one-way appreciation bets to create flexibility in the currency.”
The Bloomberg-JPMorgan Asia Dollar Index, which tracks the region’s 10 most-active currencies, slid 0.8 percent from March 14 to 114.45 as of 4:55 p.m. in Singapore, the biggest decline since June. The yuan slumped 1.2 percent to 6.2250 per dollar in Shanghai and reached 6.2370 earlier today, the lowest level since February last year, China Foreign Exchange Trade System prices showed.
The U.S. central bank trimmed its bond-buying program, which has fueled fund flows to emerging markets, this week by a further $10 billion to $55 billion. It started cutting the stimulus at the beginning of the year from $85 billion. Fed Chair Janet Yellen said March 19 that rates could start rising “around six months” following an end to the purchases later this year.
“Tapering has been priced in, but the expectation for higher interest rates was what surprised markets,” said Leo Rinaldy, an economist at PT Mandiri Sekuritas in Jakarta.
The Philippine peso sank 1.4 percent to 45.31 per dollar this week, Malaysia’s ringgit fell 0.9 percent to 3.3085 and Taiwan’s dollar slid 0.9 percent to NT$30.652. Indonesia’s rupiah lost 0.6 percent to 11,424, South Korea’s won weakened 0.7 percent to 1,080.4 and Thailand’s baht dropped 0.3 percent to 32.379. India’s rupee climbed 0.2 percent to 61.07.
China’s currency dropped amid signs growth in Asia’s largest economy is cooling after reports showed an unexpected slump in exports and slowing factory output. The risk of further defaults is also weighing on sentiment. The People’s Bank of China cut the daily fixing by a total of 0.21 percent this week to 6.1475 per dollar.
Shanghai Chaori Solar Energy Science & Technology Co. failed to make a full coupon payment on March 7, the first default in China’s onshore market. Government officials said this week that developer Zhejiang Xingrun Real Estate Co. doesn’t have enough cash to repay 3.5 billion yuan ($562 million) of debt.
“Yuan depreciation is likely to persist for a while longer as economic fundamentals are weakening and the PBOC continues to cut the fixings,” said Daniel Chan, a Hong Kong-based strategist at China Silver Global Investment Consultant Ltd. “There are also risks that structured product investors will have to unwind long positions.”
Elsewhere in Asia this week, Philippine central bank Governor Amando Tetangco signaled interest rates could rise after keeping benchmark borrowing costs at a record low 3.5 percent since October 2012. The next policy review is March 27.
Bank Negara Malaysia trimmed the lower end of its estimate for 2014 economic growth this week, saying inflation will hurt household spending amid an uneven global recovery.
Gross domestic product may increase 4.5 percent to 5.5 percent in 2014, after climbing 4.7 percent last year, according to the central bank’s annual report issued March 19. That’s wider than the Finance Ministry’s previous range of 5 percent to 5.5 percent. Inflation may come in between 3 percent to 4 percent, compared with 2.1 percent in 2013, it said.
“Fed officials’ rate forecasts were more hawkish than expected, and the market is worried about pressure from fund outflows,” said Michelle Tsai, a Taipei-based economist at Jih Sun Securities Co.