Currencies Fall After Fed Hints At Taper In November; Shares Recover

Thursday,   23-Sep-2021   09:41 AM (IST)

Asian currencies declined after the U.S. Federal Reserve signaled it would likely announce the start of the scaling back of bond purchases at its next meeting. Regional shares shrugged off the taper threat, recovering from losses triggered by the troubles at China Evergrande Group. The South Korean won, trading for the first time this week, dropped 0.8%. The Thai baht fell 0.4% and the onshore Chinese yuan and the Indonesian rupiah slipped 0.2% each. The Malaysian ringgit was little changed. The dollar index was almost flat at just below 93.50 after reaching a one-month high yesterday. Shares in Hong Kong and Australia advanced 1% and were up 0.6% in China and Singapore. A recovery in the share price of financially troubled China Evergrande alongside a rally on Wall Street despite the Fed’s hawkish outcome boosted regional shares. After the Chinese property developer yesterday said it will make an interest payment due on a local bond, the focus has shifted to a payment due on a dollar bond. Traders assessed the implications of the Fed’s statement that a moderation in the pace of bond purchases “was warranted soon” if the economy continues to make progress along the expected line. That, according to economists at Goldman Sachs, DBS, and ING, signaled the Fed will announce the beginning of tapering at its next meeting in November. Economists reckon that the pace at which the Fed will reduce the bond purchases would likely be around $15 billion considering Fed Chair Jerome Powel’s remarks that a tapering process that concludes around the middle of next year is likely to be appropriate. The Fed is currently buying assets at the rate of $120 billion a month. Meanwhile, the Fed’s dot plot was more hawkish relative to the June meeting. Now nine out of 18 policymakers expect at least one interest rate increase next year, compared with seven in June. By 2024, the median dot plot now shows a Fed funds rate of 1.75%. The S&P 500 advanced a percent yesterday while Treasury yields fell despite the pickup in likelihood of an interest rate increase next year. Traders suggested that the U.S. bond and equity market were probably positioned for a more aggressive taper outcome.