(Bloomberg) — Currency intervention has become a key battleground in emerging markets, especially Asia, as the latest leg up in the dollar piles pressure on officials to act.
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Malaysia’s central bank on Monday signaled that it stood ready to support the ringgit, which is hovering close to a 26-year low. In South Korea, Thailand and Poland, officials have said they are closely monitoring for currency volatility or spelled out they’ll step in if needed. Indonesia has gone a step further by selling dollars and China has repeatedly pushed back against depreciation, implying to traders that the yuan’s stability is key.
Faster-than-expected US inflation data last week damped bets on Federal Reserve interest-rate cuts, suggesting the battle against dollar strength isn’t going to end anytime soon. Increasing tensions in the Middle East between Israel and Iran risk creating a fresh surge in demand for the greenback as a haven.
“Right now, we do see lots of verbal intervention from different central banks,” said Marcella Chow, global market strategist at JPMorgan Asset Management in Hong Kong. Given the Fed seems unlikely to ease policy soon, “there might be more weakening with regards to Asian currencies and that may suggest that there might be more verbal intervention that’s needed,” she said in an interview on Bloomberg TV.
The uptick in central bank activity is just another zone of conflict stemming from the Fed’s pivot to higher-for-longer rates. Traders have been winding back bets on expected US rate cuts in recent months due to sticky consumer-price data, which suggests emerging-market policymakers still have plenty of work ahead of them.
Currency Jawboning
Thai policymakers are faced with a stern test in trying to support the baht, which has tumbled about 6% this year. Their approach has been to use rhetoric to try and talk it higher.
“The committee will continue to closely monitor the volatilities in the foreign exchange market,” policymakers said at their April 10 meeting. They kept interest rates on hold at the gathering to help the currency, defying the wishes of Prime Minister Srettha Thavisin who has stressed the need to ease policy.
Poland’s central bank repeated at its April 4 meeting that it may intervene to bolster the zloty. A stronger local currency helps curb inflation, policymakers said after they held rates.
And Bank of Korea officials have said they are watching the won closely, after it came under pressure last week. Governor Rhee Chang-yong’s remarks on the currency on Friday contained verbal intervention terminology, Director General Oh Kum-hwa told Bloomberg.
Selling Dollars
Bank Indonesia has gone a step further by buying the rupiah to limit losses. Governor Perry Warjiyo has said intervention and the sale of high-yielding securities will be their main levers this year to underpin the currency.
Their latest official foray was on April 2 when the local currency slid to a four-year low. In Indonesia’s case though it’s not just the dollar to blame: the rupiah has also been under pressure due to concerns about the spending plans of incoming president Prabowo Subianto.
Peru’s central bank, which surprised economists with an interest rate cut last week, is said to have been a frequent seller of dollars in recent months as it seeks to prop up the sol. Officials have said in the past the goal of interventions is to reduce currency fluctuations.
Read more: Peru Delivers Shock Rate Cut as Pension Withdrawal Approved
Although not primarily in response to the dollar, Israel’s central bank deployed unprecedented sales of its US currency following the Hamas attack in October to protect the shekel.
Many of the most interventionist central banks have been in Asia, which has seen some of the largest currency losses in the past month.
“Asian central banks just can’t let down their guard,” said Paul Mackel, global head of foreign-exchange research at HSBC Holdings Plc in London. Given that weak currencies often stoke price pressures, “it could also mean that actually the last mile of inflation is not only difficult for the US, it could be for a number of different economies,” he said.
China’s Dilemma
A prime example of the challenge facing some officials in emerging markets is China’s dilemma over the yuan: prop it up and risk worsening the economic downturn, or let it weaken and encourage capital outflows.
The central bank has chosen the former, and turned to its trusted yuan fixings as its key instrument. Policymakers have kept the daily reference rate in a tight range in recent months, even as the yuan has weakened, meaning the currency is getting ever closer to the 2% daily boundary around the fixing in which it’s allowed to trade.
The dangers of relaxing their hold have already been demonstrated. The People’s Bank of China set a weaker-than-expected fixing on March 22 and the yuan slumped the most in two months.
China is prioritizing exchange-rate stability but may have to use more tools to keep yuan depreciation at bay if the dollar continues to strengthen, said Khoon Goh, head of Asia research at ANZ Group Holdings Ltd. in Singapore.
Time to Buy?
Still, while there are few signs the dollar rally is about to let up, some analysts at least suggest this may be a decent time to start returning to some of the most beaten up currencies.
The likelihood of the Fed delaying rate cuts after March US inflation data “adds to the continued headwinds for Asian currencies,” said David Chao, a strategist at Invesco Asset Management in Singapore. “This could be an opportunity to buy the dip” in regional risk assets, he said.
What to Watch:
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The IMF and World Bank spring meetings take place in Washington. The main ministerial event will be held April 17-19
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India publishes data on trade and wholesale prices
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Israel, Poland, Saudi Arabia, and Nigeria report consumer price figures
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India’s elections begin on April 19, with Prime Minister Narendra Modi seeking a third term. The results will be known only on June 4
–With assistance from Tania Chen, Yvonne Man, David Ingles, Daedo Kim, Hooyeon Kim and Marcus Wong.
(Updates to add Bank Negara Malaysia comments in 2nd paragraph)
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