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Most regional central banks are expected to tighten their monetary policy to defend local currencies. The central banks of Philippines and Indonesia could raise policy rates in June, followed by the BoK, RBI, BoT and CBC in the Q3 and Q4, according to the latest research report from Scotiabank.
EM Asian currencies will likely weaken more amid risk aversion. While the CNY, CNH and SGD will continue running a tight correlation with the EUR, the report sounds more bearish on the high-yielding INR and IDR as well as the PHP with twin deficits. At the moment, the undervalued MYR will continue to follow a broader market tone but with a relatively lower volatility.
The European Central Bank (ECB) left its benchmark interest rates unchanged last Thursday. The central bank said the Governing Council will continue to make net bond purchases at the current monthly pace of EUR30 billion until the end of September and anticipates that the monthly pace of the net asset purchases will be reduced to EUR15 billion until the end of December 2018 and that net purchases will then end.
Fed-ECB policy divergence has boosted the DXY index, which is not a surprise given the two economies’ growth discrepancy. The EUR weakened substantially last Thursday. It loses steam and is likely to consolidate in the near future unless we see the ECB starting to talk about interest rate normalization or stronger macro data of the bloc.
Meanwhile, an escalating US-China trade dispute is expected to dampen market sentiment further, undermining EM Asian currencies particularly those of export-oriented economies. Things could get worse if the US and China ratchet up their actions, the report added.
