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Marketmind: Asia's FX doom loops

Published 09/25/2022, 04:04 PM
Updated 09/25/2022, 04:05 PM
© Reuters. Banknotes of Japanese yen and U.S. dollar are seen in this illustration picture taken September 23, 2022. REUTERS/Florence Lo/Illustration

(Reuters) - A look at the day ahead in Asian markets from Jamie McGeever

Expect an ugly open to Asian markets on Monday as investors try to shield themselves from the fallout from the widespread selling that battered stocks, bonds, and currencies on Friday.

The historic rout in UK bonds and sterling took center stage on Friday but at the heart of the gloom shrouding world markets is the Fed's drive to raise rates far higher than most people had bargained for, and the effect that is having on global rates.

And the dollar.

The dollar's 'wrecking ball' status is being painfully felt in Asia, where several currencies have sunk to multi-year or record lows, and central banks have intervened to try and stop the rot.

On Friday, India's rupee hit a record low, Indonesia's rupiah and China's yuan fell to their weakest levels since mid-2020, the Thai baht slumped to a 16-year low, and South Korea's won hit a 13-year trough.

Falling currencies increase inflationary pressures, forcing policymakers to turn more hawkish, tightening financial conditions, and crushing demand. Central banks will find it hard to break this doom loop.

Their pool of FX reserves for intervention purposes is also limited - even the Bank of Japan will be aware its $1.3 trillion stash won't last forever if it follows last week's historic dollar-selling intervention often enough.

And talking of doom loops, if Asian central banks sell chunks of their U.S. Treasuries holdings to support their domestic currencies, U.S. yields rise, Treasuries are more attractive, investors pile in, and the dollar strengthens.

Asia's economic and corporate calendars on Monday are light.

A batch of Japanese economic data, including retail sales and consumer confidence, and China's September PMIs will give an insight into the health of the region's two largest economies at the end of the week.

India's central bank announces its latest interest rate decision on Friday too.

© Reuters. Banknotes of Japanese yen and U.S. dollar are seen in this illustration picture taken September 23, 2022. REUTERS/Florence Lo/Illustration

Key developments that could provide more direction to markets on Monday:

German Ifo (September)

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