AS THE FED HIKES, ASIAN MONETARY CONDITIONS STAY LOOSE AS GDP SAGS, AND FOR SOME, SUCH AS KOREA, MORE SUPPORT IS STILL NEEDED

Strong US growth has pushed upward the price of the USD, tightening liquidity globally, affecting those that need borrowing more. In response, Asian central banks have diverged in their reaction, depending on funding needs and domestic ability to stomach tighter financial conditions. Some have followed the Fed - Indonesia has done most with 150bps rate hike and imposition of import duties, which we expect to narrow the current account deficit in 2019. As a result, our Natixis Monetary Condition Index ( NXMCI ) shows that most Asian countries tightened in September versus August, except for China, Korea and Australia. Still, only four countries have tight monetary conditions in Asia – Indonesia, Singapore, India and Malaysia. Australia, China, and Korea’s high level of leverage and slowing output momentum cause them to diverge from the Fed. For China, the vulnerability lies in corporates while Australia and Kore a’s are in the household sector . October data , from China manufacturing PMI to Korea industrial production , all point to decelerating output ahead, requiring further support. Bottom-up data , too , shows weakness – mirroring a sharp contraction of investment in Q3 2018 that led growth to slow to 2.0% YoY in Q3 from 2.8% in Q2 – Samsung Electronics reported better earnings but weaker capital expenditure for 2018. The good news is that there is still plenty of room for support. Although all EM Asian FX weakened versus the USD this year, the REER for South Korea is still tight, as other currencies have weakened more. Korea has a large current account surplus and exports a lot of this savings via overseas investment, which means it is not too concerned about a weaker FX and policy divergence with the Fed as the economy does not have a financing gap. Indeed, a weaker Korean won is positive for its export sector as well as industrial giants. For example, the top 40 firms in the KOSPI2 gain most of the revenues from overseas . Therefore, the BOK may tolerate more FX weakness to absorb the shock. In short, we do not expect Asian central banks to stand idly by as the price of USD rises and will do what they can to help to steer their economies to a gentle landing. They are well armed with appropriate ammunition thanks to lessons from the Asian Financial Crisis, which ha ve caused them to be vigilant with reserve management, external debt exposure and gradual liberalization of the capital account. Indonesia and the Philippines are likely to be the only ones to follow the Fed most closely as they have relat ively low level of debt and require foreign financing.