Most Asian currencies, stocks rise ahead of Fed decision

• Bank of Japan raises short-term rates
• Thai baht, Malaysian ringgit lead gains
• Inflation data awaited from South Korea, Indonesia

Emerging Asian currencies rose on Wednesday while most stock markets inched higher, with investors awaiting the U.S. Federal Reserve policy decision due later in the day after the Japanese central bank raised rates for the second time since 2007.

The Malaysian ringgit and the Thailand baht gained most among emerging Asian currencies. The baht <THB=TH> rose about 0.3%, while the ringgit <MYR=> climbed about 0.4% to linger near its January highs on economic growth prospects and bets of U.S. rate cuts in coming months.

Investors globally were awaiting the decision of the world’s most influential central bank where it is likely to stay pat on rates, but further commentary on a possible interest rate cut in September will be keenly eyed.

Market participants have largely priced in a September rate cut, with more than 85% odds of a 25 basis-point reduction, according to the CME FedWatch tool.

The Bank of Japan raised its short-term interest rate target to 0.25% and unveiled a detailed quantitative tightening plan.

Among other Asian currencies, the Singapore dollar <SGD=>, the Philippines peso <PHP=> and the South Korean won <KRW=KFTC> were flat to 0.2% higher.

The Fed cutting rates could pave the way for Asian central banks to start easing their own policy stances, even though it may not be as beneficial for emerging Asia, according to Jonathan Koh, an economist and FX analyst from Standard Chartered said.

“I think some (Asian) central banks could cut interest rates following the Fed, so in a way the interest rate differential may not actually narrow in favour of Asian currencies but usually when the Fed cuts, it may lead to a risk-on sentiment for the EM Asia currencies,” Koh said.

A wider interest rate differential is usually beneficial for riskier emerging market assets as investors will seek higher returns, boosting capital inflows.

Asian traders were also awaiting inflation data from Indonesia and South Korea, due this week, to gauge the stance of their respective central banks in terms of interest rates.

Both central banks had held their interest rates earlier in month, citing that more economic evidence was needed to pivot to rate cuts.

Most emerging Asian share markets rose, with Chinese stocks <.SSEC> up about 1.8%, while Thailand <.SETI>, Philippines <.PSI>, Malaysia <.KLSE> and Indonesia <.JKSE> traded higher between 0.2% and 0.6%.

HIGHLIGHTS:

** Reserve Bank of India to hold rates in August, first cut in Q4

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** China’s July factory activity shrinks, services grow more slowly

 —Reporting by Archishma Iyer in Bengaluru; Editing by Subhranshu Sahu