Surge in inflation expectations from Donald Trump’s pro-growth stance raises risks of EM capital outflows

A sharp rise in inflation expectations rising from U.S. president-elect Donald Trump’s pro-growth stance have increased risks of outflows of capital from the region including China, noted Scotiabank in a research report. Overseas investors, last Friday, withdrew money from stock markets in Korea, Indonesia, Thailand and Taiwan by USD 410.9 million, USD 184.3 million, USD 105.8 million and USD 753.6 million, respectively. A net of USD 761.8 million of global funds were also offloaded of Thailand’s bonds.

Regional regulators have committed to keeping a close watch on the markets and curtailing excess volumes if required.  Bloomberg had noted that the Reserve Bank of India sold the USD via state-run banks on Friday, whereas the Bank Indonesia was in the market to steady the Indonesian rupiah. Bank of Korea governor had stated on Friday that the central bank could steady the foreign exchange market without a specific level if volatile.

The Malaysian central bank governor also stated that the central bank would manage “extreme volatilities in the MYR with no targeted level”. Meanwhile, the Monetary Authority of Singapore stated that it is ready to curtail excessive volatility in the trade weighted SGD if required, noted Scotiabank.

“As the USD has been overbought against some regional currencies such as the KRW, the MYR, the SGD according to the RSI index, we look to buy the USD on dips in the run-up to December FOMC meeting”, added Scotiabank.

As the downward pressure on the Chinese yuan is likely to continue and extend into 2017 amidst persistent capital outflows, the People’s Bank of China is expected to refrain from delivering broad easing measures. Moreover, the PBoC would take measures to curtail over-speculation regarding the depreciation of the yuan if required. CFETS RMB Index is expected to stay stable in the midst of market turmoil.

The Chinese central bank would be maintaining yuan interbank funding costs at a particular level in order to curtail excess leverage in bond markets and ask financial institutions to channel the funds into the real economy, stated Scotiabank.