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Asian Central Banks Exhale as Volatile Capital Flows Steady

Asian central banks have hit a sunny patch in terms of policy management, with a knock-on for stabilising capital flows.

Asian Central Banks Exhale as Volatile Capital Flows Steady
Pedestrians cross a road outside the entrance to the Bank of Korea museum at the central bank’s headquarters in Seoul, South Korea. (Photographer: Jean Chung/Bloomberg)

(Bloomberg) -- Asia’s stabilizing financial markets are allowing the region’s central banks to exhale as currencies find their feet and investor money returns.

It’s a crucial reprieve after unprecedented outflows from emerging markets and currency turmoil that followed the coronavirus outbreak. As countries slowly begin reopening and the Federal Reserve likely pauses for now, the pressure is off central bankers in the region to cut interest rates even lower.

“Asian central banks have hit a sunny patch in terms of policy management, with a knock-on for stabilizing capital flows,” said Vishnu Varathan, head of economics and strategy, at Mizuho Bank Ltd. in Singapore. “This means that central banks in the region can afford to ‘wait and watch’ to better assess the impact easing so far.”

Asian Central Banks Exhale as Volatile Capital Flows Steady

The Fed meets Wednesday to decide on what next for its unprecedented range of emergency programs that has included as much as $2.3 trillion in loans. While it’s unlikely to signal any moves for now, many economists expect it to harden its commitment to easy monetary policy later in the year.

A tracker of capital flows into emerging economies by the Institute of International Finance found portfolio flows are back in positive territory. Currencies like Indonesia’s rupiah, which crashed to a 22-year low, is now up more than 7% against the dollar in the past month. Others like the Thai baht, South Korean won and Malaysian ringgit have also rebounded.

Driving the better mood is a weaker U.S. dollar -- the Bloomberg Dollar Spot Index has fallen to its lowest level since early March -- lower Treasury yields and the tidal wave of central bank liquidity that’s helping to juice stock markets.

Asian Central Banks Exhale as Volatile Capital Flows Steady

It’s a timely reprieve, given interest rates around the region have already been cut to historic lows to buffer the effect of the coronavirus and some authorities have had to take unconventional steps, such as snapping up government bonds.

While the People’s Bank of China has resisted the kind of large-scale stimulus rolled out by its peers, it continues to inject cash through programs to help small firms survive the slump. India’s central bank cut its benchmark rate to the lowest since it was introduced two decades ago and has pledged to take “whatever measures are necessary” to support the economy.

What Bloomberg’s Economists Say

“Stabilizing financial markets and capital flows will give Asia central banks breathing space. The central banks have been trying to keep borrowing costs low by cutting interest rates and using unconventional measures. The least they would want now would be having to raise rates to fend off capital outflows.”

-- Chang Shu, chief Asia economist

The Bank of Korea and the Bank of Thailand will probably be most relieved by the relative stability given both have little room to cut rates further. For Indonesia -- which surprisingly left rates on hold for the past two months -- the stronger rupiah will be an opportunity to restock currency reserves.

“It is a case of different strokes for different folks,” said Wei Liang Chang, a macro strategist at DBS Group Holdings Ltd. in Singapore. “By and large, the return of inflows and the softer dollar will contribute to easing financial conditions for everyone, though implications for policy are slightly different depending on individual countries.”

Asian Central Banks Exhale as Volatile Capital Flows Steady

That doesn’t mean it’s all smooth sailing from here.

For Southeast Asia, which was hit hard by the market turmoil, capital inflows may remain subdued in the coming year or two and volatility could return in the near term given the heightened uncertainty about the global economy, Fitch Ratings Ltd. analysts led by Stephen Schwartz warned.

Strengthening local currencies could also snuff out any economic recovery on the ground with gauges for manufacturing remaining weak. Thailand’s central bank has already expressed concern about the baht’s rally and said it’s ready to take necessary steps to ensure it doesn’t hurt the economy.

“Asian economies are generally export-oriented economies, hence strengthening currencies will add to economic recovery challenges,” said Tuuli McCully, the Singapore-based head of Asia Pacific economics at Scotiabank.

Read More: Dollar Slide Fuels Asia Central Bank Wariness, Reserves Boost

Asian Central Banks Exhale as Volatile Capital Flows Steady

Policy makers will need to keep up their guard given the still sluggish backdrop for world growth, International Monetary Fund First Deputy Managing Director Geoffrey Okamoto told reporters in an online briefing on Tuesday.

“When countries see the pressures abate they may think to themselves, I have passed the storm,” Okamoto said. “If history has taught us anything is that these things can turn on a dime.”

Still, conditions are better than where they were in the depth of the coronavirus crisis.

The biggest emerging economy of them all -- China -- is continuing to defy expectations of a market shock. The yuan’s 30-day historical volatility -- a gauge measuring the currency’s swings over the past month -- is close to the lowest since January.

“Stabilizing markets and the return of capital inflows are taking the pressure off Asian currencies and central banks,” said Chua Hak Bin, senior economist at Maybank Kim Eng Research Pte. “They can take a breather and pause, as their economies emerge from the emergency phase of the Covid crisis.”

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