A couple are silhouetted as the Two International Financial Center (IFC) stands in the background in Hong Kong, China. (Photographer: Anthony Kwan/Bloomberg)

Stronger Case for Fed Rate Rise Increases Volatility in Asia

(Bloomberg) -- Asian currencies look set for a bumpy ride over the next three months after Federal Reserve Chair Janet Yellen said Friday that the case for an interest-rate rise has strengthened, amid growing speculation the hike could come as early as next month.

Yellen’s statement will create some volatility over the next three months, Raymond Yeung, chief economist at ANZ Banking Group in Hong Kong, said by phone. “The cost of the U.S. funding will increase, and Asian currencies will be under downward pressure.”

Still, some Asian nations would be willing to sacrifice capital outflows in exchange for the boost in export competitiveness that a weaker currency would provide, Yeung said. The Fed next meets Sept. 20-21 just hours after the Bank of Japan announces the results of its comprehensive review and decides policy, with Bank of Japan Governor Haruhiko Kuroda saying the review wouldn’t lead to a shrinking of policy.

"A rate move in the short term may not be that welcome by the equities side but from a global growth perspective, it does anchor U.S. as the engine of growth," said Song Seng Wun, an economist at CIMB Private Banking in Singapore. "A stronger U.S. would be beneficial for global confidence and in turn for export-oriented economies like Singapore and other Asian economies."

Increased Odds

Goldman Sachs Group Inc. sees increased odds of an rise next month -- with a 40 percent chance now compared with an earlier 30 percent --  economists led by Jan Hatzius wrote in a note the primary dealer published Friday. ANZ expects an interest rate hike in December, but there’s also very high chance that a rate may come in September given Yellen and other board member’s comments, Yeung said.

One market that will be watching the Fed decision closely is Hong Kong, which pegs its currency to the U.S. dollar. The Hong Kong Monetary Authority raised its base rate for the first time in nine years and flagged the risk of rising capital outflows from the city immediately after the Fed hiked rates in December 2015.

A rate increase was one factor that could lead to capital outflows, Bank of Korea Governor Lee Ju Yeol said this month, before noting that this was dependent not only on the rate gap between the U.S. and South Korea but also on other countries monetary policies and the outlook for Korea’s economy.

The Philippine central bank “will not necessarily have to move in sync with the Fed,” though it is mindful of near-term volatility, Governor Amando Tetangco said in a text message after Yellen’s speech.

Yellen said in her speech in Jackson Hole, Wyoming, that the Fed expects moderate growth in real gross domestic product, which would be beneficial for exporter nations like Japan and South Korea, whose shipments have struggled recently.

“Exchange rates did move quite a bit” after Yellen’s comments, and that yen weakening is a small positive for Japanese shares, said Toru Suehiro, the senior market economist at Mizuho Securities Co. in Tokyo. Suehiro doesn’t see any impact on the BOJ’s policy review, although Yellen’s comments may lead rates in Japan to rise.