The US Federal Reserve’s decision to delay raising interest rates has opened a policy window for Taiwan and South Korea to cut borrowing costs as the risk of outflows drops.
Sovereign bonds from the two Asian economies rallied yesterday after the Fed refrained from raising borrowing costs, while signaling a move is still likely this year. Monetary tightening in the US would push up US Treasury yields, exacerbating outflows from developing nations. Taiwan and South Korea are both struggling with a slump in exports amid a slowdown in China, their biggest market.
“A delayed hike gives Asian central banks more room to support liquidity,” especially Taiwan and South Korea, Societe Generale SA Hong Kong-based head of Asia ex-Japan rates strategy Frances Cheung (張淑嫻) said. “Even if it’s not an explicit rate cut, they can at least maintain loose liquidity.”
The yield on Taiwan’s sovereign bonds due 2020 fell six basis points, the most for benchmark five-year notes in almost a year, to 0.82 percent as of 12:16pm in Taipei, according to Taipei Exchange prices.
The three-year yield in South Korea dropped five basis points, the biggest decline since May, to 1.64 percent, Korea Exchange prices showed.
Traders now see a 44 percent chance the Fed will raise rates by December, while 18 percent expect a move to come next month.
In Taiwan, where rate reviews are held quarterly, four of 21 economists surveyed by Bloomberg last month predicted a cut on Thursday next week, while four said the move would come in December. The rest saw no change.
Seven of 23 economists expect the Bank of Korea (BOK), which has monthly policy meetings, to lower its key rate by 25 basis points from a record-low 1.5 percent by year’s end, while the remainder forecast it will stay on hold.
The window for Taiwan to ease is this month, and that for South Korea is next month or November, BNP Paribas SA Hong Kong-based economist Mark Walton said before the Fed decision.
The Bank of Korea said that while it sees a gradual improvement in the economy, there are still uncertainties including China’s slowdown and instabilities in emerging markets, according to its policy statement this month.
“If the timing for Fed tightening policy is pushed back, any burden the Bank of Korea would have when they lower interest rates, including foreign-investor outflows, eases,” Daewoo Securities Co Seoul-based fixed-income analyst Yoon Yeo-sam said. “Government bond yields will head downwards amid bets for BOK easing.”
The US dollar was trading at NT$29.7 at 10am today on the Taipei Foreign Exchange, as the New Taiwan dollar gained NT$1.364 from the previous close last week. The NT dollar continued to rise today, after surging 3.07 percent on Friday. After opening at NT$30.91, the NT dollar gained more than NT$1 in just 15 minutes, briefly passing the NT$30 mark. Before the US Department of the Treasury's semi-annual currency report came out, expectations that the NT dollar would keep rising were already building. The NT dollar on Friday closed at NT$31.064, up by NT$0.953 — a 3.07 percent single-day gain. Today,
‘SHORT TERM’: The local currency would likely remain strong in the near term, driven by anticipated US trade pressure, capital inflows and expectations of a US Fed rate cut The US dollar is expected to fall below NT$30 in the near term, as traders anticipate increased pressure from Washington for Taiwan to allow the New Taiwan dollar to appreciate, Cathay United Bank (國泰世華銀行) chief economist Lin Chi-chao (林啟超) said. Following a sharp drop in the greenback against the NT dollar on Friday, Lin told the Central News Agency that the local currency is likely to remain strong in the short term, driven in part by market psychology surrounding anticipated US policy pressure. On Friday, the US dollar fell NT$0.953, or 3.07 percent, closing at NT$31.064 — its lowest level since Jan.
The Financial Supervisory Commission (FSC) yesterday met with some of the nation’s largest insurance companies as a skyrocketing New Taiwan dollar piles pressure on their hundreds of billions of dollars in US bond investments. The commission has asked some life insurance firms, among the biggest Asian holders of US debt, to discuss how the rapidly strengthening NT dollar has impacted their operations, people familiar with the matter said. The meeting took place as the NT dollar jumped as much as 5 percent yesterday, its biggest intraday gain in more than three decades. The local currency surged as exporters rushed to
PRESSURE EXPECTED: The appreciation of the NT dollar reflected expectations that Washington would press Taiwan to boost its currency against the US dollar, dealers said Taiwan’s export-oriented semiconductor and auto part manufacturers are expecting their margins to be affected by large foreign exchange losses as the New Taiwan dollar continued to appreciate sharply against the US dollar yesterday. Among major semiconductor manufacturers, ASE Technology Holding Co (日月光), the world’s largest integrated circuit (IC) packaging and testing services provider, said that whenever the NT dollar rises NT$1 against the greenback, its gross margin is cut by about 1.5 percent. The NT dollar traded as strong as NT$29.59 per US dollar before trimming gains to close NT$0.919, or 2.96 percent, higher at NT$30.145 yesterday in Taipei trading
RSS