Asian currencies edge down on caution ahead of risk events

Reuters: Asian currencies edged lower on investor caution ahead of major occurrences such as the British general election result, the European Central Bank’s policy meeting, and Senate testimony from ex-FBI director James Comey due in the coming 24 hours.

The dollar index recovered on Thursday after written testimony from Comey provided no major revelations about an investigation into alleged collusion between President Donald Trump’s campaign staff and Russian operatives. The dollar index was up 0.1% on the day at 96.705.

“Part of weakness in the Asian currencies is due to recovery in the US dollar,” said Khoon Goh, head of Asia research at Australia and New Zealand Banking Group in Singapore.

“Market participants are waiting for key risk events to pass.”

Analysts said the outcome of the British election will have a major impact on risk assets such as emerging Asia currencies because the defeat of Prime Minister Theresa May could lead to global uncertainty.

Opinion polls on Wednesday showed May on course to increase her majority in parliament in Britain’s election.

“In the event of a hung parliament or Labour victory (low probability scenario but should never be ruled out), GBP vols should rise as uncertainty takes over. PM Theresa May’s political career could be jeopardised and Brexit future will raise fresh uncertainties,” Maybank said a report.

A hawkish tone from the European Central Bank meeting on Thursday could also be detrimental to Asian currencies if it prompts flows out of the region, analysts said.

The ECB is widely expected to keep policy unchanged on Thursday, including its 2.3 trillion euro ($2.59 trillion) bond-buying program.

Tracking weaker equity markets, the South Korean won and the Philippine peso edged lower, while the Thai baht dropped from the two-year high it reached earlier this week, though all three currencies later pared their losses.

A five% fall in crude oil prices on Wednesday kept the ringgit and rupiah lower.

China’s yuan eased after the central bank set its official guidance lower for the first time since it changed the yuan fixing mechanism last week, shrugging off better-than-expected May trade data.

The Federal Reserve’s policy rate decision is due next week, with analysts saying any statement that points to another hike would support the dollar.

The focus is expected to return to the Fed’s policy path beyond the June hike and whether the interest rate differentials between the United States and Asia will start to matter for Asian currencies,” said Christy Tan, head of markets strategy/research, Asia, at National Australia Bank.

Indian rupee

The Indian rupee was down 0.09% at 64.380 per dollar on Thursday.

India’s central bank on Wednesday kept its policy repo rate unchanged at 6.25%, as widely expected, while lowering its projections for inflation after recent data showed consumer prices rising more slowly.

“The RBI had also cut their inflation outlook for the months ahead, while the recent strength in the INR is detrimental to industry competitiveness. With that, we believe there will be a 25 bps rate cut in the upcoming 2 August monetary policy meeting, (with) another 25bps cut in the 6 December policy meeting,” United Overseas Bank said in a report.