EM Asian currencies likely to rally going forward amid global pro-growth stance, remain susceptible to risk aversion: Scotiabank

The emerging market Asian currencies are expected to rally going forward amid global pro-growth stance, while remaining susceptible to risk aversion intensifying abruptly in response to the headlines on US-China trade talks, according to the latest research report from Scotiabank.

On Monday, the IMF said it now projects a 3.5 percent growth rate worldwide for 2019 and 3.6 percent for 2020, down 0.2 and 0.1 percentage points respectively from its last forecasts in October. The Fund downgraded its global outlook for the second time in three months. In China, the authorities have stepped up efforts to spur economic growth.

The PBoC said on Thursday that it will set up central bank bills swap (CBS) to boost liquidity for banks’ perpetual bonds, with the aim of encouraging banks to replenish capital through perpetual bond issuance amid China’s economic slowdown. Banks’ perpetual bonds with ratings at no lower than "AA" will be included as qualified collateral for a medium-term lending facility (MLF), a targeted medium-term lending facility (TMLF), a standing lending facility (SLF) and re-lending.

The CBIRC, China’s banking and insurance regulator, said yesterday that the nation will allow insurance institutions to invest in tier-2 capital bonds and perpetual bonds issued by banks. Meanwhile, we note some regional central banks are in no rush to deliver a rate cut for now despite their dovish stance. BoK Governor Lee Ju-yeol said yesterday that it's not the right time to consider further monetary easing with still accommodative monetary policy, the report added.

BI Governor Perry Warjiyo also said in an interview with Bloomberg on Thursday that a rate cut may still be difficult at the moment although the benchmark interest rate is near its peak. Market sentiment will likely continue swinging between risk aversion and risk appetite till uncertainty surrounding US-China trade talks fades. US Commerce Secretary Wilbur Ross said in an interview on CNBC on Thursday that "we’re miles and miles from getting a resolution," downplaying expectations for an end to the US-China trade war.

He told Bloomberg later that the US and China are eager to end their trade war, but the outcome will hinge on whether Beijing will deepen economic reforms and further open up its markets. White House economic adviser Larry Kudlow said the conversations with Chinse Vice Premier Liu He’s team next week will be a crucial test of whether the two sides can come to an agreement, adding that President Donald Trump remains "rather optimistic."

"Finally, the US and China are expected to reach a trade deal by the March 1 deadline, boosting risk appetite and regional financial assets including currencies at that time," Scotiabank reported.