Emerging markets are poised to benefit from the easing of US monetary policy, which could pave the way for interest rate cuts in many countries. As inflation in the Asia-Pacific region continues to decline, the likelihood of further interest rate reductions in many countries increases. The Philippines has taken the lead among Asian central banks, following the People's Bank of China (PBOC), by reducing its interest rate by 25 basis points last month.
China could implement another expansion of its monetary policy, as it is becoming increasingly difficult for the country to achieve its 5% growth target by relying solely on the increase in exports and industrial production. With a sharp slowdown in the real estate sector, the country needs more domestic consumption, for which a low-interest-rate environment can stimulate both investiment and consumption.
Meanwhile, Japan stands out as a major central bank with a divergent monetary policy in the region, as it has been raising interest rates to combat inflation that has exceeded its 2% target. While further rate hikes are plausible, the market should be prepared for such moves, unlike the surprise increase in August that led to strong devaluation in emerging countries such as Brazil and Mexico.
Favorable market conditions have created opportunities for Asian currencies to appreciate year-over-year. This valuation, combined with increased purchasing power and economic growth driven by dovish monetary policies, could promote a favorable environment for commodities in 2025.
It is important to consider that there are risks in the market. The weakening of the dollar will occur, but it will be gradual and non-linear. After interest rate cuts in the U.S., the market may react to macroeconomic data with risk aversion. The high public deficit, especially in a scenario of tax cuts next year, could lead to higher yields on U.S. Treasuries, which would provide support to the dollar.
Despite the improvement, several countries still face the risk of rising inflation, such as India, which is under significant pressure from food prices. This could increase the caution of central banks in the region, leading them to opt for a slower pace of interest rate cuts and, consequently, lower growth the next year.
Source:
Hedgepoint, Refinitiv
The shift in U.S. monetary policy is paving the way for interest rate cuts in Asia, with some countries already starting this process. The fact that the Philippines, which cut rates in August, did not experience a significant currency devaluation serves as an incentive for other countries in the region to follow suit.
China, which has experienced deflationary pressures in recent months, has been adopting monetary stimulus measures to strengthen its economy. It is possible that the country will make further adjustments to its interest rates to achieve its 5% growth target.
In this context, several Asian currencies are appreciating against the dollar, which enhances purchasing power for these countries and could lead to increased demand for commodities, particularly agricultural ones.
However, the weakening of the dollar is expected to be gradual and non-linear, meaning we will likely see periods of dollar appreciation as well.
