Greater forex volatility on the cards as Asian regulators follow MAS’ suit

Who will be next to jump on the easing bandwagon?

Asian forex markets may see greater volatility in the coming months, with more policymakers feared to allow local currency weakness in response to the Monetary Authority of Singapore’s surprise policy shift.

“The MAS has historically been seen as one of the most-forward looking and credible central banks in Asia. So the risk is that other policymakers become much more permissive of local currency weakness in response to the MAS’ decision, especially in places where the inflation outlook is low and where the pass-through impact of a weaker currency is smaller,” HSBC stated in a report.

The MAS is the third central bank in Asia to significantly surprise the market after the Bank of Japan and the Reserve Bank of India and the market will increasingly question who will be next.

“Those central banks which have been selling USD to manage local currency weakness (such as the BNM) may take a step back, suggesting that we could see even higher levels of USD-Asia than we had previously been expecting. A growing number of central banks (in both G10 and EM) are loosening monetary policy and generating currency weakness (implicitly if not explicitly). The USD rally, which is still relatively small compared to some historic occurrences, could therefore continue to gather pace, and there is a growing risk that this becomes a destabilising force for FX markets and that FX volatility picks up further from here,” the report noted.