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Asian currencies jump on bets Fed will slow rate hikes

Currencies and bonds in Asia’s emerging markets were set to finish the month on a strong note, after data showing the U.S. economy shrank for a second straight quarter raised bets that the Federal Reserve might slow the pace of rate hikes.

The Philippine peso PHP= strengthened as much as 1.3% on Friday and was on track for its best session since May 2016 against a weaker dollar. The Indonesian rupiah IDR= hit a one-month high and was poised for its biggest monthly gain since December last year.

“I am assuming that both Bank Indonesia and Bangko Sentral ng Pilipinas are selling U.S. dollars, and I wouldn’t be surprised to see the Reserve Bank of India doing the same this afternoon,” said Jeffrey Halley, a senior market analyst for Asia Pacific at OANDA.

The Indian rupee INR=IN strengthened to its highest in nearly three weeks and was tracking its best day since mid-March.

The yield on Indonesia’s benchmark 10-year bond ID10YT=RR fell a further 12.8 basis points (bps) to 7.182%, its lowest since early June.

The U.S. economy unexpectedly contracted in the second quarter, raising the risk that the economy is on the cusp of a recession.

Money markets currently give 76% odds that the Fed will slow the pace of rate hikes to half a point at its next meeting in September, against a 14% probability for a third consecutive 75-bp increase.

Earlier this week, the Fed hiked rates by a widely expected 75 bps.

But even as the United States pushes ahead with its steepest rate hikes in a generation, investors are unusually poised to buy in Asia’s emerging markets, betting authorities can tame inflation without triggering the capital-flight chaos of previous cycles.

“Asia FX is likely to gain some respite in the near term, as easing global headwinds could trigger an unwind of specific USD longs,” analysts at Barclays said in a note.

But with markets still unsure of the Fed’s next steps, more clarity is needed before Asian currencies see lasting gains.

Stocks in the region also posted gains. Equities in Jakarta .JKSE, Mumbai .NSEI and Taipei .TWII were up between 0.5% and 0.9%. Shares in Manila .PSI, however, were down 1.3%.

Meanwhile, Chinese leader Xi Jinping warned against playing with fire over Taiwan in a call with U.S. President Joe Biden, highlighting Beijing’s concerns about a possible visit to the Chinese-claimed island by U.S. House Speaker Nancy Pelosi.

Markets in Thailand were closed for a holiday.

HIGHLIGHTS
** Malaysia’s 10-year bond yield MY10YT=RR falls to 3.941% – nearly four-month low

** S.Korea June industrial output up 1.4% year-on-year, compared to Reuters poll of a 2.0% jump – Stats Office

** Singapore Q2 prelim unemployment rate up 2.1%

Asia stock indexes and currencies at 0610 GMT

COUNTRY
FX RIC
FX DAILY %
FX YTD %
INDEX
STOCKS DAILY %
STOCKS YTD %
Japan

JPY=

+0.98
-13.46
.N225

-0.18
-3.56
China

CNY=CFXS

+0.04
-5.77
.SSEC

-0.60
-10.36
India

INR=IN

+0.43
-6.40
.NSEI

0.90
-1.57
Indonesia

IDR=

+0.57
-4.01
.JKSE

0.47
6.20
Malaysia

MYR=

+0.11
-6.34
.KLSE

0.29
-4.59
Philippines

PHP=

+1.01
-7.68
.PSI

-1.27
-11.58
S.Korea

KRW=KFTC

-0.30
-8.55
.KS11

0.59
-17.74
Singapore

SGD=

+0.12
-2.11
.STI

-0.52
2.57
Taiwan

TWD=TP

-0.03
-7.51
.TWII

0.73
-17.67
Thailand

THB=TH


-8.89
.SETI


-4.90
Source: Reuters (Reporting by Harish Sridharan in Bengaluru; Editing by Subhranshu Sahu)

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