Markets are pricing in less aggressive policy easing by central banks in emerging Asia’s export-dependent economies, following signs of reduced trade frictions between the US and China.Swap traders are now expecting nine basis points of interest rate cuts by the Bank of Thailand over the next three months, versus nearly 20 basis points at the end of April. In Malaysia and South Korea, pricing of monetary loosening has also eased.
In comparison, the outlook for central bank dovishness has remained largely intact in more domestically focused economies such as India and the Philippines.
The shifting expectations reflect optimism that the latest tariff truce between the world’s top two economies may lessen some Asian countries’ need to lower interest rates sharply to support growth. That said, investor mood may change quickly if future US-China talks stall or President Donald Trump repeats his previous episodes of walking back on agreements.
“US-China trade relations are a key sentiment anchor to regional markets,” said Winson Phoon, head of fixed-income research at Maybank Securities. While a potential US-China trade deal would be a boost to the region, it doesn’t mean smooth sailing for Asian economies which still need to negotiate with the US individually, he said.Similar to Thailand, ringgit swaps in Malaysia are now pricing in nine basis points of monetary easing over the next three months, from as much as 13 basis points just before the nation’s central bank left rates unchanged on May 8. In South Korea, won swaps are forecasting 11 basis points of rate cuts over the same horizon, versus 14 basis points at the end of April.In contrast, thawing US-China tensions haven’t had such an impact on the region’s less export-dependent countries. The Philippine peso’s overnight indexed swaps are signaling four basis points of easing over the next three months, compared to the forecast of a status quo at the end of April.In India, rupee swaps are pricing in 26 basis points of policy loosening over the same time frame, up from 24 basis points at the end of last month.Trade as a percentage of gross domestic product in Malaysia stood at 132% in 2023, according to data from the World Bank, followed by Thailand at 129% and South Korea at 88%. India’s share was 46%.Also Read: Japan’s economy shrinks for first time in a year before tariff jolt
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