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Marketmind: U.S. default risk clouds Korea, Indonesia rate decisions

Passersby are reflected on an electric stock quotation board outside a brokerage in Tokyo

By Jamie McGeever

(Reuters) - A look at the day ahead in Asian markets from Jamie McGeever.

The central banks of South Korea and Indonesia announce interest rate decisions on Thursday, against a backdrop of growing nervousness across world markets that the U.S. could be sleepwalking to an unprecedented and catastrophic default.

Bank of Korea and Bank Indonesia are both expected to keep their benchmark policy rates on hold at 3.50% and 5.75%, respectively, and keep them there into the third quarter before diverging.

Economists surveyed by Reuters expect BOK to cut rates in the fourth quarter, and BI to ease policy early next year. The impact for markets, especially FX, will likely come from the policy statements.

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The won has ticked up a little bit this week, hitting a one-month high on Tuesday near 1,300 per dollar. The rupiah has been going the other way recently, slipping from a one-year high at the start of the month to trade back towards 15,000 per dollar.

The New Zealand dollar, meanwhile, will be looking to recover from its slump on Wednesday. At one point, down 2.5%, it was on course for its worst day in more than three years, after the Reserve Bank of New Zealand raised rates to a 14-year high but signaled it was done tightening.

The Chinese yuan's depreciation continues, falling further below 7.00 per dollar to its weakest level since November amid deteriorating Sino-U.S. relations, most notably around trade and cybersecurity.

Whatever the regional drivers of market pricing and sentiment may be on Thursday, the bigger picture will be dominated by yet another day without a deal in Washington to raise the $31.4 trillion federal debt limit.

Wall Street closed in the red, the MSCI World index fell around 1% for the second day in a row, and Japan's benchmark Nikkei 225 index finally got vertigo at its new 33-year high and registered its steepest decline in seven weeks.

Talks between top-ranking Republicans and Democrats continue but the longer they go without agreement the more nervous investors are getting. With the U.S. government potentially days away from default, the yield on some T-bills maturing in early June surged above 7%.

While debt ceiling fears are pushing up ultra-short dated yields, rates markets continue to push up expectations of a Fed rate hike next month. It's a curious dance - the Fed would surely not be raising rates if the U.S. default.

Here are three key developments that could provide more direction to markets on Thursday:

- South Korea interest rate decision

- Indonesia interest rate decision

- Singapore GDP (Q1)

(By Jamie McGeever)