Asian currencies retreat, bond yields rise on revised Fed rate cut hopes

Asian currencies witnessed a decline on Monday, led by Malaysia's ringgit and South Korea's won, as regional bond yields saw an uptick. The adjustment comes in the wake of revised expectations for the Federal Reserve's policy easing, prompted by robust US jobs data released last week.

The ringgit depreciated nearly 1 per cent, hitting a three-month low, while the won and the Philippine peso also retreated by 0.9 per cent and 0.6 per cent, respectively.

Friday's data revealed an acceleration in US job growth for January, accompanied by the most significant wage increase in almost two years. This signals sustained strength in the labour market and has led investors to recalibrate their expectations for rate cuts by the Federal Reserve.

Maybank analysts noted, "The Fed historically tends to make rate cut decisions based on labour market indicators. The strong NFP (non-farm payrolls) should, therefore, give the Fed added comfort in staying their hand on cutting rates."

Traders are now pricing in a mere 20 per cent chance of the Fed commencing rate easing in March, according to the CME FedWatch tool.

The robust payrolls report and Federal Reserve Chair Powell's comments emphasizing the central bank's cautious approach in deciding when to cut its benchmark interest rate triggered a rebound in the dollar. Consequently, US Treasury yields rose, with two-year yields surging eight basis points to 4.451 per cent, and ten-year yields climbing four basis points to 4.07 per cent.

The shift influenced regional bond yields, leading to a rise in South Korea's 10-year Treasury bond yields by 11 basis points and Singapore's 10-year benchmark yield by 9.4 basis points.

On the economic front, Indonesia's annual economic growth showed a slight dip but remained robust at 5.05 per cent for the previous year, in line with the government's outlook. The rupiah experienced a 0.2 per cent decline.

Bank Indonesia's governor indicated the central bank's readiness to lower interest rates in 2023 to boost economic growth, contingent on the rupiah strengthening against the dollar. Meanwhile, in Thailand, headline CPI dropped to its lowest in 35 months in January, causing the baht to decline by 0.5 per cent.

The Bank of Thailand is expected to maintain its key interest rate this week, according to a Reuters poll, amid recent political pressures to cut rates despite negative inflation for the past three months.

Investors will closely watch the Reserve Bank of India's rate decision and inflation data from the Philippines, Taiwan, and China this week. Concerns over China's economy and markets will also remain in the spotlight.

(With Reuters inputs)