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Macroscope | Asia’s market turmoil has the US’ fingerprints all over it
- Sell-offs are happening in markets around Asia despite key economic indicators improving, with core inflation in particular moderating
- The overriding factor is the divergence in global monetary policies, with the rapid rise in US Treasury yields sucking capital out of emerging markets
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An adage on Wall Street is that to quell inflation, the US Federal Reserve must raise interest rates until something breaks. In Asia, the cracks have deepened significantly over the past few months, fuelling concerns about financial stability across the region.
On Monday, the Malaysian ringgit sank to its lowest level against the US dollar since the 1997-98 Asian financial crisis, taking its decline versus the US currency since early February to nearly 13 per cent. With the exception of the Japanese yen, it is the worst-performing currency in Asia this year.
The Indian rupee, moreover, is trading within a whisker of its record low against the US dollar, reached in October last year. The selling pressure faced by the Indonesian rupiah was so intense this month that it forced the country’s central bank to raise interest rates last week. When Bank Indonesia last tightened policy in January, it was confident it had done enough to bring inflation back to within its 2 to 4 per cent target.
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However, the financial landscape in Asia has changed so dramatically in the past several months that the region’s local currency government debt markets suffered net outflows of foreign capital in August having enjoyed inflows as recently as June, according to data from JPMorgan.
What is particularly concerning is that the sell-off is happening at a time when key economic indicators are improving. Core inflation, which strips out volatile food and energy prices, in India has dropped to 4.8 per cent, having been higher than 6 per cent in January. In Indonesia and Malaysia, it has fallen to 2 to 2.5 per cent, while in Thailand – which has also faced heavy selling pressure – it has slipped to just 0.8 per cent.
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Pakistani families struggle to pay electricity bills that can take up entire pay cheque
Pakistani families struggle to pay electricity bills that can take up entire pay cheque
In some countries, especially those that are net energy importers, domestic risks have contributed to the turmoil. India’s current account deficit is widening and could go further if oil prices rise sharply because of the dramatic escalation in geopolitical risk stemming from Israel’s war against Hamas. Meanwhile, a stronger-than-anticipated increase in Indonesia’s bond issuance has exacerbated the sell-off in the nation’s local debt market.
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