Asian currencies, stocks surge on US rate cut hopes

Asian emerging market stocks experienced gains on Thursday, with notable increases in the Taiwanese dollar and the South Korean won, driven by growing expectations of US interest rate cuts that heightened investors' risk appetite. 

Singapore's shares surged by 1.5 per cent, reaching their highest level since October 12, while equities in Kuala Lumpur, Manila, and Seoul saw gains ranging from 0.2 per cent to 1.1 per cent 

In the currency markets, the Taiwanese dollar strengthened by 0.6 per cent, reaching its highest level since June 16, poised to achieve its most crucial quarterly gain since March 2017. 

The South Korean won also increased by 0.5 per cent, and Thailand's baht strengthened by 0.4 per cent to its highest level since July 31, on track for its most crucial quarterly jump in five quarters. 

As the US dollar weakened to multi-month lows, emerging Asian assets gained ground towards the year-end.

Poon Panichpibool, a markets strategist at Krung Thai Bank, expressed optimism that emerging market currencies would perform well in 2024, anticipating further weakness in the US dollar due to the potential onset of a recession around the second quarter, prompting several rate cuts. 

However, he cautioned that recession fears could trigger a sell-off across emerging market assets, leading to underperformance in the short term during risk-averse periods.

Investor attention is focused on the expected timing of interest rate cuts by the Federal Reserve, with a CME FedWatch tool indicating an 89 per cent probability of a cut in March 2024.

Alvin Tan, head of Asia FX strategy at RBC Capital Markets, expressed scepticism about the sustainability of the recent rally in Asian emerging market currencies into the new year, stating that the market's expectation for Fed rate cuts starting in Q1 is possibly overstated. 

The market is now awaiting a stream of data, including US initial jobless claims and Thailand's trade data, scheduled for later in the day, along with South Korea's inflation figures on Friday.

(With Reuters Inputs)