Asian currencies to stay buffered from stresses

0

REMAIN PROTECTED: Asian currencies will remain buffered from the stresses within the global economy with prudent policies in Asia and stronger underlying flows. — AFP photo

KUALA LUMPUR: Asian currencies will remain buffered from the stresses within the global economy with prudent policies in Asia and stronger underlying flows.

This combined with a much more negative US dollar outlook, says Paul Mackel, HSBC head of Asian Currency Research in the HSBC Global Research Report.

“Over the past few years when the US economy slowed more than expected, we would see the US dollar strengthens and vice-versa,” said the report.

But since March this year, the US economic activities data have been significantly weaker than expected, but the US dollar has failed to strengthen.

Furthermore, it will be difficult for the US dollar to stage a significant rally if the market has come to think that more Quantitative Easing (QE) by the Federal Reserve could eventually be around the corner.

As such, it had become harder to justify buying the US dollar outright in bad times, possibly hinting at a shift in the US dollar’s reserve currency status.

The US dollar had not consistently benefitted in a ‘risk off’ environment but some Asian currencies were still sensitive to deteriorating market conditions.

The South Korean won, for example, was the most sensitive currency to the ebb and flow of ‘risk on–risk off’ dynamics. So when market conditions deteriorated (risk off), the won was put under downward pressure.

However, the won’s weakness ran into strong headwinds as US dollar fundamentals were also very weak.

The end result had seen US dollar-won moving in a range, albeit a volatile one.

The Chinese renminbi, at the other end of the spectrum, was not very sensitive to ‘risk on-risk off’ dynamics, suggesting the Chinese currency movements more a function of policy.

“In our view, the renminbi’s strength will continue helping authorities fight inflation. The Chinese renminbi remains one of our preferred currencies in the region.

“With inflation still a burning issue in Asia, we believe policymakers do not necessarily want their currencies to weaken,” said the research report.

This helps to explain why there are some evidence of intervention to limit upside pressures of US dollar-Asia (such as US dollar selling).

Asian currencies were not a safe haven.

However, neither was the US dollar, based on the views provided by the HSBC Global Research.

That, and the more supportive flow backdrop, suggested that US dollar-Asia would not spike sharply higher.

“We would still look to sell US dollar-Asia on rallies, with won and the Singapore dollar the most likely to benefit from any return to ‘risk on,” said the HSBC Global Research.

Key to this would be a stabilisation in global economic data relative to expectations, the report added. — Bernama