A portrait of Mahatma Gandhi appears on an Indian rupee banknote in this arrangement photo taken on Wednesday, September 12, 2018 in Bangkok, Thailand.
Brent Lewin | Bloomberg | Getty Images
The Fed took a dovish stance in December, and markets are pricing in rate cuts through the summer.of CME FedWatch Tools He suggested the first 25 basis point rate cut in 2024 could come as early as June.
The Federal Reserve’s January meeting ended with the central bank leaving its benchmark borrowing rate unchanged at a range of 5.25% to 5.5%.
Experts told CNBC that currencies such as the Chinese yuan, South Korean won and Indian rupee stand to benefit from the Fed’s accommodative monetary policy.
China has weathered a number of disappointing headlines that have eroded investor confidence. However, pessimism about the yuan is limited by expectations that authorities in trade-dependent countries will not allow the currency to fall below a certain level.
China has tried to stabilize the yuan against the dollar in the past and is expected to continue to do so, said Arun Varas, chief investment officer at Bel Air Investment Advisors.
“The exchange rate has fallen to the 7 handle of the USD/RMB exchange rate, reflecting the weak Chinese economy, but as policymakers have started to become more proactive with fiscal stimulus, credit expansion, and supporting real estate values. , further decline is difficult to imagine,” said Ms. Bharata.
He noted that the Chinese currency’s exchange rate is likely to remain in a “narrow band around the current exchange rate of 7.10.”
Unlike other major currencies such as the Japanese yen and US dollar, which have free-floating exchange rates, China strictly controls the onshore renminbi. The currency is pegged to the dollar at a so-called daily midpoint, based on the previous closing price level of the yuan and quotes obtained from interbank dealers.
Last year, the onshore yuan hit a 16-year low of 7.2981 yuan against the dollar.
If the Fed starts cutting rates by the summer, the yield gap between the world’s two largest economies will likely narrow, relieving some pressure on the yuan. Yield spread is a way to compare bonds by the difference in their yields.
The People’s Bank of China has a key role in currency management, which Simon Harvey, Head of Currency Analysis at Monex, says can be done through daily exchange adjustments, liquidity measures, regulatory channels, and directing state-owned banks to intervene. He said that. .
The last method is the most uncertain because the total dollar amount of China’s foreign exchange reserves is unknown.
The Indian rupee could benefit this year from carry trades, a strategy in which traders borrow low-yielding currencies such as the U.S. dollar to buy high-yielding assets such as bonds.
“There are a lot of carry trades against other currencies such as the yen and the euro, but once US interest rates fall, the interest rate differential will widen and carry trades will become possible. It will be positive for the currency as well,” said Anindya Banerjee, vice president, currency and derivatives research at Kotak Securities.
The rupee may strengthen on expectations that the Reserve Bank of India will ease monetary policy more slowly than other central banks.
Banerjee said the Reserve Bank of India’s pace of rate cuts is “much slower” than the Fed, and that “India doesn’t have the same inflation problems as Europe or the US, so it will always be far behind the Fed.” did.
“The reason is simple: Fiscal policy is in full force, the economy is doing very well and we don’t want it to overheat at this point,” Banerjee said.
The rupee has appreciated to 82.82 rupees against the dollar in the past three months. The currency’s depreciation in 2023 was 0.6%, significantly reducing its depreciation against the dollar compared to the previous year’s 11% depreciation.
The Korean won has been under pressure for three years, but an improving economic outlook and easing Fed policy should ease the strain in 2024.
“As a low-yielding, highly cyclical currency, we believe that a US rate cut will not only relieve pressure on the won through the interest rate channel, but that the Korean won will be one of the key beneficiaries of the Fed’s easing cycle in the second half of this year. “But it will also lead to an improvement in the global growth outlook,” Monex’s Harvey said.
But Harvey said the won’s rise will also be determined by the extent of the Fed’s rate cuts. He predicted that the currency could appreciate between 5% and 10% if the easing cycle is deep, but only 3% if the easing cycle turns out to be shallow.
South Korea’s economic outlook is also expected to improve this year.of international monetary fund It forecasts growth of 2.3% in 2024 and 2025, higher than last year’s 1.4% growth.
