Most Asian FX, stocks fall on rates outlook volatility

Most Asian currencies and stocks fell on Tuesday, with the South Korean won leading the losses, pressured by a
stronger U.S. dollar as investors continued to gauge the path of interest rates in the world’s largest economy.

The MSCI emerging markets currency index fell more than 0.3 percent to trade near a one-month low.

An unexpected drop in U.S. producer prices in December reinforced the view that rate cuts by the Federal Reserve could come as soon as March.

Markets are now pricing in a 70-percent chance of a 25-basis-points cut in March, versus 63 percent a week earlier, the CME FedWatch Tool showed.

European Central Bank officials on Monday pushed back on expectations on slashing interest rates, with Bundesbank President Joachim Nagel saying it was too early to discuss cuts.

“We continue to stay wary of the risk that DXY may inch up higher amid risks of some fine-tuning in the aggressive Fed rate cut bets,” analysts at Maybank wrote.

Market participants now await Fed Governor Christopher Waller’s speech later on Tuesday, who shifted from his traditionally hawkish stance in November.

Investors were also cautious on the uptick in Brent crude prices after Middle East tensions escalated, leading to a spike in shipping rates between Asia and Europe, which may add to existing inflation woes.

Geopolitical cracks

Back in Asia, the South Korean won slumped as much as 0.9 percent to hit its lowest since early November. The third consecutive session of fall brought the currency’s losses to more than 3 percent since the start of 2024.

Geopolitical cracks have further spread, with tensions rising between North Korea and South Korea, with the former’s leader Kim Jong Un calling for the South to be seen as the “primary foe”.

Other Asian units such as the Thailand baht, Philippines peso, Malaysian ringgit and the Singapore dollar
slipped between 0.1 percent and 0.5 percent.

The Taiwan dollar extended losses for a third consecutive session, falling about 0.6 percent, after the Democratic Progressive Party’s candidate Lai Ching-te won the presidency for the third consecutive term, even as the party lost parliamentary majority.

Analysts at both DBS and Saxo Markets, however, expect stability to return for North Asian currencies like the South Korean won and the Taiwan currency, as geopolitical risks remain contained, while an upturn in the semiconductor cycle is extended further.

Among Asian equities, Seoul, Taipei, Bangkok fell between 0.2 percent and 1.1 percent. Jakarta and Mumbai
were the only outliers in the region, with their shares rising about 0.4 percent and 0.1 percent, respectively.