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Sydney - Central banks from India to Indonesia stepped in to stabilize their currencies and the yen snapped a five-day losing streak as an Asian market selloff deepened on concern Donald Trump will pursue policies that spur capital outflows from developing economies and weaken their exports.
The yen strengthened against all of but two of its 31 major peers on haven demand. The Indonesian rupiah, Indian rupee and South Korean won were the worst performers.
Trump has signaled he’ll adopt more protectionist trade policies, while introducing fiscal stimulus that’s likely to hasten interest-rate increases by the Federal Reserve, providing a shot in the arm for US stocks. The S&P 500 Index gained 0.2% on Thursday, adding to a 1.1% gain on November 9.
“We are seeing carnage in Asian FX markets,” said Robert Rennie, head of financial markets strategy at Westpac Banking in Sydney. “It’s providing a very strong reminder that the S&P 500 is not the correct barometer of Trump-driven risk aversion - it’s Asian currencies.”
The yen rose as much as 0.5% and was 0.3% stronger at ¥106.51/$ as of 09:33. The euro added 0.2% to $1.0913 after gaining as much as 0.3%.
The rupee sank to a seven-week low of 67.105 per dollar. The rupiah plunged as much as 3% to reach a five-month low of 13 545 against the greenback as emerging-market currencies headed for their worst three-day rout since 2013. The won was 1.2% weaker after dropping to a level not seen since June 29.
Stepping in
Indonesia’s monetary authority is already in the market to stabilize the rupiah, and doesn’t see much fund outflows and expects the move to be temporary, Nanang Hendarsah, head of financial market deepening at the nation’s central bank, said in a text message.
Bank Negara Malaysia Governor Muhammad Ibrahim said the monetary authority’s role is to continue managing “extreme volatilities in the ringgit with no targeted level.”
Indian state-run banks sold dollars on behalf of the Reserve Bank, according to two Mumbai-based traders, who asked not to be identified. Former Governor Raghuram Rajan had said the central bank intervenes to curb volatility and doesn’t target any particular rupee level.
Read More: Former RBI governor’s influence lingers in Indian currency market
Bank Negara Malaysia Governor Muhammad Ibrahim said the central bank’s role is to continue managing “extreme volatilities in the ringgit with no targeted level.”
Ringgit forwards tumbled even as movements in the spot currency remained restrained after the Malaysian central bank’s comments. One-month non deliverable contracts dropped 2% to 4.4595 ringgit per dollar, while the spot rate was down 0.2% at 4.2825.
‘Freight train’
“It’s more a smoothing action because of the velocity of the moves today,” said Jeffrey Halley, a market strategist at Oanda Asia Pacific in Singapore. “They’re not going to try to stand in front of a freight train. We may see more of this going forward. A lot of these emerging markets are going to have quite a lot of work to do vis-a-vis managing their currencies.”
The MSCI Emerging Markets Currency Index fell 0.5%. China’s yuan was set for its steepest weekly drop since January, when a series of weaker fixings roiled global financial markets.
The Bloomberg Dollar Spot Index, which tracks the currency against 10 major peers, slipped 0.2%. It is still up 2.4% for the week, the most since May 2015.
Investors are betting Trump will cut taxes, ramp up infrastructure spending to spur economic growth and inflation, triggering Fed rate increases. Traders see an 80%probability of a quarter percentage-point hike at the central bank’s December meeting, according to pricing in federal funds futures, and swaps trading shows the expectation for a faster tightening cycle.
Overnight index swap contracts implied the central bank’s benchmark rate will be 1.11% in two years’ time, compared with the expected 0.82% at the end of last week. That means the market is pricing in another hike as Trump’s win and Republicans controlling Congress portend a wave of spending to bolster the US economy.
After Trump’s election, benchmark 10-year Treasury yields climbed above 2% for the first time since January on speculation the likely spending to spur growth will quicken inflation. Trump’s proposals include pledges to cut taxes and spend as much as $500bn on infrastructure.
“The dollar’s been capped at ¥107 since last night,” said Nizam Idris, head of foreign-exchange and fixed-income strategy at Macquarie Bank in Singapore. “The market is losing patience perhaps, but I don’t think it is anything big. The market’s tone remains negative on bonds, emerging markets, positive on US stocks and the dollar.”
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