EM Asian currencies likely to rally amid accommodative dollar liquidity, says Scotiabank

The emerging market Asian currencies are expected to rally amid accommodative dollar liquidity if the US Treasury Department conducts the currency intervention along with the Fed’s insurance rate cuts, according to the latest research report from Scotiabank.

Last Thursday, US Treasury Secretary Steven Mnuchin said on the side-lines of a G7 financial meeting in France that "this is something we could consider in the future but as of now there's no change to the dollar policy."

His remarks have raised market concerns over increasing risks of a US Treasury currency intervention to curb the dollar strength. The US has intervened in currency markets for three separate occasions since 1996, including a purchase of JPY in June 1998, a purchase of EUR in September 2000, and a sale of JPY in March 2011.

The last time the US intervened in the currency market was on March 18, 2011 together with other G-7 nations to arrest the yen strength following a devastating earthquake and tsunami that occurred one week earlier on March 11, 2011.

According to a webpage of the Federal Reserve Bank, the New York Fed is authorized by the FOMC to intervene in the FX market by executing FX transactions for the System Open Market Account (SOMA), and in its capacity as fiscal agent of the US for the Exchange Stabilization Fund (ESF) as directed by the US Treasury Department.

The US currency interventions have historically been coordinated with other central banks, especially those that issue the currency or currencies involved in the intervention, according to the New York Fed, the report added.

However, instead of winning a broad support, a currency intervention aimed at weakening the dollar would antagonize other central banks this time and spark worries over a competitive devaluation of other G-10 currencies. There is little evidence that either the ECB or the BoJ would support the US Treasury’s efforts.

"In our view, the actual result of an intervention will depend on whether the fundamentals and market conditions are standing in the US Treasury Department’s favour," Scotiabank further commented in the report.