In a late Thursday revelation, the United States economy demonstrated robust expansion, registering a 2.9% annualized growth rate in the fourth quarter. This figure, exceeding economists’ projections, stirred an immediate response in Asia, instilling faith among investors that the Federal Reserve might successfully navigate a soft landing. This optimism, palpable on Friday, resulted in a surge of capital into regional currencies and stocks.
The Philippine Peso and the Malaysian Ringgit each appreciated by 0.4% on January 27, spearheading the rally. However, the intriguing aspect lies in the implications for central banks across the region.
For months, Asian finance officials have been navigating a precarious balance. To defend currencies, they must consider raising interest rates, a move that could stifle domestic growth. On the other hand, a slower rate hike may lead to capital outflows towards the U.S. dollar.
The robust U.S. GDP figure alters this delicate equation. It indicates the Federal Reserve may be able to ease its own rate hikes without precipitating a recession.
This scenario would result in less pressure on Asian currencies to continue their upward trajectory in search of higher yields. Additionally, the export-dependent economies of Southeast Asia might avoid a sudden contraction in American demand. Analysts at TD Securities highlighted one significant factor: the replenishment of foreign-exchange reserves.
They noted that this development “strengthens the optimistic outlook for Asia FX amid the China reopening narrative.” However, they also issued a note of caution: “while we are encouraged by this development, we are hesitant to overcommit given that much is already priced in.”
The optimism is indeed tangible, but it is not boundless. The reserves are indeed recovering, but the rally may already incorporate this fact.
Not every currency participated in the advance. The Thai baht, a top regional performer, actually declined by 0.3% on Friday. The Indonesian rupiah, aiming for a third consecutive weekly gain, dipped 0.2%.
The Singapore dollar and the South Korean won each fell by 0.2% and 0.1%, respectively. Currency traders are selectively investing, favoring certain currencies over others.
The potential risk here lies in the pace of China’s reopening. This narrative — the world’s second-largest economy abandoning its zero-COVID policy to revive growth — has dominated Asian markets since early January. The U.S. GDP data does not supplant this narrative.
Instead, it bolsters it. A resilient American consumer ensures a market for China’s export sector.
A soft-landing Federal Reserve ensures capital remains accessible for emerging markets. The stock market response was clear. MSCI’s broadest index of Asia-Pacific shares outside Japan climbed as much as 0.55% on Friday, reaching a nine-month high.
Investors were wagering on the combination of U.S. resilience and Chinese reopening to boost corporate earnings across the region. OCBC analysts captured the prevailing sentiment: “optimism that the U.S. Fed may be able to orchestrate a soft landing.” This is the core bet.
If the Fed succeeds, Asian central banks can cease their battle against inflation and currency depreciation on two fronts. If the Fed stumbles — if the economy slips into recession — then the peso, the ringgit, and the rest will face renewed pressure.
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