The Indonesian rupiah and South Korean won both face stern tests this week as central banks in the two nations meet to review interest rates. One of the currencies may cope better than the other.
Policy makers in Jakarta and Seoul are being compelled to reduce borrowing costs for much the same reasons: economic growth is slowing amid simmering global trade tensions. That’s where the similarity ends.
The rupiah has strengthened 2.7% this year, making it one of Asia’s best performers, as Bank Indonesia has supported the currency to underpin investor confidence and S&P Global Ratings raised the nation’s credit rating, citing prudent fiscal policy.
Indonesia’s reliance on foreign inflows to fund its current-account deficit has meant the central bank has felt compelled to maintain exchange-rate stability to prevent a repeat of the outflow of hot money seen during the 2013 “taper tantrum” and the emerging-market sell-off last year.
In addition, Indonesia’s high real interest rates provide the central bank with a sizeable buffer to ease policy without hurting the attractiveness of its bonds. The nation’s 10-year debt currently yields 7.23%, the highest in major Asia markets.
A rate cut is likely to have more of an impact on Korea’s won, which has already weakened more than 5% this year, the region’s worst performer.
Japan Conflict Pressure on Bank of Korea to act has been rising after the economy contracted in the first quarter amid a tech slowdown.
A smouldering feud with Japan over trade has added to the problems facing the export-dependent nation, which is already caught in the trade-war crossfire between the US and China, its two major trading partners. The won has limited appeal to overseas funds given that 10-year yields are just 1.57%, more than five percentage points lower than Indonesia.
Eighteen of 21 economists surveyed by Bloomberg predict Bank Indonesia will cut its key rate by 25 basis points on Thursday to 5.75%, according to data compiled up to the end of last week. Eight of 16 forecast Bank of Korea will trim its benchmark by the same amount to 1.50%.
Westpac Banking Corp., the most accurate forecaster for Asia’s emerging currencies in the most recent Bloomberg rankings, this week gave its verdict on the outlook for the two currencies. It lowered its forecast for the won, while saying the rupiah is likely to be supported by bond inflows.
Below are key Asian economic data and events due this week:
Monday, July 15: China Q2 GDP, industrial production, retail sales and fixed assets ex rural, Indonesia trade balance, Philippine overseas remittances, India wholesale prices and trade balance, and New Zealand performance services index.
Tuesday, July 16: RBA minutes and New Zealand Q2 CPI. On Wednesday, July 17: Singapore non-oil domestic exports. On Thursday, July 18: Australia employment and NAB business confidence, Japan trade balance, Bank of Korea and Bank Indonesia rate decisions. On Friday, July 19: Japan CPI and South Korea PPI.