(Bloomberg) -- Dovish wagers are growing for Asian central banks as the Federal Reserve’s policy pivot makes room for more rate cuts in the region by reducing the threat of capital outflows.
Bond and swap market traders are increasingly betting on rate cuts in the Philippines, Indonesia, South Korea and India as the Fed’s recent half percentage point rate reduction narrows their interest rate gap with the US and favors local assets.
A swathe of stimulus measures announced in China on Tuesday is also boosting Asian currencies, making way for more rate cuts in the region. These dovish wagers are likely to give another leg up to local bonds as the Bloomberg EM Asia bond index indicated returns of over 6% so far this quarter, on pace for the highest since 2008.
Here are four charts that show how dovish wagers have gained momentum in emerging Asia:
Philippines
The Philippine two-year yield slumped last week, widening its gap with the local policy rate to the most since 2016. That’s after Philippine Finance Secretary Ralph Recto, who is also a BSP committee member, said on Thursday he will back a 50-basis-point rate cut at the panel’s next meeting in October. BSP slashed the reserve requirement ratio for larger banks by 250 basis points on Friday to inject about 250 billion pesos ($4.5 billion) into the economy.
BSP Governor on Wednesday also flagged the possibility of two more rate cuts this year.
“The Reserve Bank of India and Bangko Sentral ng Pilipinas have scope for deeper-than-expected rate cuts while Bank Indonesia may also be positioned to cut aggressively based on its action and rhetoric,” said Vishnu Varathan, head of economics and strategy at Mizuho Bank Ltd. in Singapore.
“The ability to hitch a ride down on policy rates could lead to some downside in local currency yields, although this may see some headwinds if Treasury curve steepening picks up pace,” he added.
Indonesia
Indonesia’s 2-year yield fell a couple of basis points after the country’s central bank announced a surprise rate cut on Sept. 18, but its 12 basis point drop the following day in response to the Fed rate reduction signaled an increase in dovish wagers. Bank Indonesia is the most focused on its currency and the Fed policy compared with other Asian central banks, Barclays Plc strategists including Mitul Kotecha wrote in a note last week.
South Korea
Won swaps are pricing nearly 50 basis points of easing over the next six months, from around 30 basis points at the end of June. Dovish wagers rose for the Bank of Korea after Governor Rhee Chang-yong said on Thursday that the central bank can now fully focus on domestic factors, as the Fed’s rate cut has eased concern over the impact on the forex market.
BOK, BSP and BI are the most sensitive to Fed policy in Asia, with potential for the Korean central bank to potentially ease as early as October, Goldman Sachs Group Inc. strategists including Danny Suwanapruti wrote in a note on Sunday.
India
India’s 2-year yield has trended lower, narrowing the gap with the policy rate to around 17 basis points. Thats the smallest since September 2021, signaling growing conviction among traders for a RBI rate cut. Rupee swaps are currently pricing around 40-basis points of easing over the next three months, from virtually no rate cuts over the same period at the start of August.
Goldman Sachs in a Sept. 22 note recommended staying long two-year government bonds due to a prospective quarter-point rate cut from the RBI in December, easing by the Fed and better banking system liquidity.
©2024 Bloomberg L.P.
