An effective, albeit painful, way to stop the decline in regional currencies brought on by the Federal Reserve’s hawkish stance is to raise interest rates. While Indonesia tries to draw foreign capital into the rupiah, the yen lost 3.4% last quarter and edged closer to the level that led the Ministry of Finance to enter the market almost a year ago. The Philippines isn’t trying to hide its opposition to the peso falling far below USD 57. Officials from the Fed are stressing that borrowing costs will remain high for a longer period of time, notwithstanding their lack of true certainty over another raise. Asian bankers would prefer a method of handling the local consequences that doesn’t stifle growth, so this isn’t fantastic for them. Because of the softening of the world economy, officials are cautious about tightening too much. The only option left is to enter the market, which is dangerous yet possible. The approach, which was formerly a fairly common reaction to unfavorable exchange-rate changes, had lost favor before the epidemic. State transactions intended to affect the direction of the exchange rate have subsequently lost some of their stigma.
It’s frequently said that intervention will never succeed. However, there are situations in which it may be beneficial. Knowing when to buy is only one aspect of what makes for a successful conclusion. The objectives must be distinct from the overall economic strategy. Without the latter, a satisfying conclusion might be difficult to find. Intercession isn’t the best option if the goal is to reverse a sharp decrease in the currency rate into a long-lasting rally. A tactical victory for the government is feasible if the goal is to slow down events and make bears reconsider their bets. Even then, Jerome Powell, a friend of mine, will probably be needed to assist Asian authorities. The Fed should be very explicit that it has stopped raising interest rates, and it should keep saying it until enough people get the message. John Williams, president of the New York Fed, poked fun at himself during prepared remarks on Friday, but his point has to be emphasized. It is important to consider the Philippines’ situation. The moves taken by Manila a year ago, when the dollar was surging, are instructive. Rarely does a country whose currency is under attack specify a particular level as a no-go area. Manila, however, set a limit at 60 pesos to the US dollar. The precision was unexpected; not even major economies with reserve currencies, such as the UK, Japan, China, or the Eurozone, are as direct.
The peso wasn’t the only one who was struggling. For the first time in a generation, Japan purchased yen, Switzerland ended its experiment with negative interest rates, and a British prime minister was toppled by the collapse of the pound. The 60 peso line was stable. Was the Philippines especially shrewd or was the archipelago simply lucky? On September 30, 2022, then-Fed Vice Chair Lael Brainard gave a speech that wasn’t well-received but may have been significant. President Joe Biden’s senior economic advisor, Brainard, acknowledged the dangers of financial instability. She reaffirmed the Fed’s position that more rate hikes were necessary because inflation was too high, but she placed an emphasis on “proceeding deliberately.” She anticipated the Fed’s transition to 25-basis point increments from half-point and three-quarter-point increases. The dollar stabilized, and 2023 was predicted to be a generally calm year.
But that’s not how things turned out. What reaction has the Philippines made? The peso will be bought at roughly 57 pesos to the dollar, according to officials. The possibility of an out-of-cycle rate increase is not discounted by the central bank. Holding out the possibility, even if it doesn’t happen, doesn’t damage limiting the currency. Because of this, the yen declined when Bank of Japan Governor Kazuo Ueda spent his press conference on September 22 retracting statements he had made to the Yomiuri newspaper earlier in the month. The suggestion that negative interest rates might stop as soon as December in the interview was seen as an effort to bolster the currency. After being involved in the FX market in the 1990s and the early 2000s, Japan is now largely absent from it. The appearance of Eisuke Sakakibara, the former top international bureaucrat at the Ministry of Finance, is the surest indication that the “I” word is in the air. He was given the moniker “Mr. Yen” because MOF was willing to step in during his administration. According to Sakakibara, as long as the yen doesn’t fall below, say, 155 to the dollar, the government will likely try to tough it out at this point.
His perspective on what could change the course of events was the interview’s most intriguing aspect. You guessed it: A change in the Fed’s position following the December meeting of the Federal Open Market Committee, as well as a potential increase in Japanese interest rates in 2019. A rally toward 130 could occur as a result of that combination. Everyone else must accept it while it lasts because it is the Fed’s rate. The grin is not necessary.
Please note that this article does not offer any instructions or suggestions regarding investment decisions. Therefore, it is essential that you carefully evaluate your financial situation and conduct thorough analysis, or seek advice from a qualified professional, before making any investment decisions.