Asian FX, bonds rally as Fed signals pause in tightening

Indonesia’s rupiah and the South Korean won led gains among Asian currencies, while regional bonds rallied on Thursday, after the US Federal Reserve signalled a pause in its aggressive policy tightening cycle.

The Fed, as expected, raised its benchmark interest rate by a quarter of a percentage point overnight, but an omission from its policy statement marked a change in tone, as it no longer said it “anticipates” further rate increases would be needed.

A pause should give Fed officials time and space to assess inflationary trends and ongoing challenges such the fallout from recent bank failures and the political standoff over the US debt ceiling.

Back in Asia, all major currencies strengthened.

The rupiah appreciated 0.8% to 14,570 per US dollar, hitting its highest level since June 10, 2022.

The local 10-year benchmark bond’s yield slipped to 6.467% – its lowest level since February last year.

The rupiah is the best performing currency in Asia this year, having risen nearly 7%.

Bank Indonesia has stood pat on rates in its last three meetings, and has said that strong capital inflows are likely to support the currency.

“IndoGBs (Indonesian government bonds) benefit from the constructive bond environment in the US at the moment, and a sanguine supply outlook domestically,” said Frances Cheung, rates strategist at OCBC.

“That said, chasing yields lower is not preferred given the still compressed yield differentials with U.S Treasuries.”

US Treasury yields dropped to 3.3337%. The greenback was down 0.1%.

South Korea’s won rose over 1% in its biggest single-day gain in three weeks. The benchmark 10-year yield slipped to 3.287%.

Equities mostly traded in narrow ranges. China’s benchmark index opened weaker as mainland markets returned after their May Day holidays but rebounded, led by state-owned firms.

Indonesian rupiah rises on weak dollar; Asia stocks gain

A private sector study showed China’s factory activity unexpectedly dipped in April due to softer domestic demand and suggesting the manufacturing sector is losing momentum amid a bumpy post-COVID economic recovery.

The yuan rose 0.4% – eyeing its best session since mid-April.

Markets in Malaysia were closed, a day after the country’s central bank unexpectedly raised its benchmark interest rate by 25 basis points to 3%, which some economists suggest could mark the end of the current tightening cycle.

Markets in Thailand were also shut for the day.

Meanwhile, the Hong Kong Monetary Authority (HKMA) raised its base rate charged through the overnight discount window by 25 basis points to 5.50%, its highest since January 2008, hours after the Fed delivered its 25 bp rate hike.

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