As the dollar index strengthened over 3 per cent from April this year, a number of emerging currencies in Asia have come under pressure including the Indian rupee, which has dropped 6 per cent against the greenback so far this year. Higher inflation and weakening rupee have veered the central banks of most countries towards a rate hike stance.
The South Korean won has been trading in a broad range of 1060 to 1080 a dollar. Keeping this in mind, the Bank of Korea (BOK) raised its policy rates by 25 basis points to 1.50 per cent almost after six years in its policy meet in November 2017. The Korean economy is showing early signs of recovery after softer economic data which had contracted after the policy rates increased. Headline Inflation increased by 1.6 per cent in April from 1.3 per cent in March which is close to BOK’s target of 2 per cent. Going further, the creeping up of headline inflation should support BOK’s hawkish rate stance.
The Monetary Authority of Singapore decided to increase slightly the slope of the Singapore dollar nominal effective exchange rate (S$NEER) policy band from zero at its monetary policy statement on April 12. The central bank forecast that the Singapore economy will remain on a steady growth path this year. It also believes core inflation is likely to rise gradually over the course of 2018 and 2019. Retail sales data released after policy meet has contracted -1.5 per cent (YoY) in March from 8.6 per cent, headline inflation came down to 0.2 per cent in March from 0.5 per cent in February.
Meanwhile, the Japanese yen has appreciated from 112 to 104 a dollar before it bounced back again to 110.65. Appreciation in yen has come on the back of investor’s expectations on Japanese economy rebounding after several years of deflationary situation. Escalating geo-political tensions early during the year also supported the yen appreciation. Lower than expected CPI at 0.9 per cent had completely dissipated the chances of rate hike by Bank of Japan. Once the geo-political tensions cool off, the Japanese yen is likely to touch lower levels in 2018.
In India, foreign portfolio investment (FPI) outflows on the back of surge in US treasury yields were the major driver for the rupee weakening which is not the case in other Asian currencies. It is not easy for the Reserve Bank of India (RBI) to pump in dollars into the market given the current economic situation. Rather than the RBI focusing on market intervention, its hawkish stance on monetary policy could stop the rupee free fall.
The author is a Fundamental Research Analyst at Karvy Forex and Currencies Pvt Ltd