With Fed expected to raise the federal funds rate above 3.5% by mid-2023, Asian-Pacific currencies and asset markets are likely to be affected with potential outflows of capital from Asia’s economies especially emerging economies, S&P Global Rating said
It said that up until June 20, 2022, the Asian emerging markets currencies had on average weakened 5.0%, a modest amount compared with the Asia-Pacific developed markets’ average of 7.2% (excluding the pegged Hong Kong dollar) and 8.0% for the euro.
S&P said that the exchange rate movements suggest that markets have so far generally focused more on the divergence of monetary policy and energy price increases than on potential emerging market vulnerability.
“Where the monetary policy outlook remained accommodative, currencies have depreciated against the U.S. dollar, with the Japanese yen the starkest example. In response to the energy price increases, markets have also favored the currencies of net energy exporters such as Australia and Indonesia, “it said
S&P said that against this backdrop, Asia-Pacific central banks are weighing the desire to support growth against the need to tighten policy to anchor inflation expectations or to head off financial instability.
It said that many central banks are on course to tighten substantially because of higher inflation. “Where CPI inflation is already exceeding targets significantly and is bound to rise further, central banks will seek to tighten monetary policy and maintain their credibility. Central bankers in emerging markets that are vulnerable to capital outflow in the context of an increasingly hawkish U.S. Fed have little policy room,” and the will likely need to tighten,” it said.
It said that this is especially the case for net energy-importing emerging markets without a current account surplus to start with as the current accounts will turn into significant deficits in 2022 due to higher energy prices.