Asian currencies to rise as markets price in Fed policy shift

Friday, 5 July 2013 00:00 - - {{hitsCtrl.values.hits}}

Reuters: Asian currencies will gain some ground against the U.S. dollar in the next twelve months despite sputtering regional economies and dwindling yields, according to a consensus forecast in a Reuters poll. Emerging Asian currencies have been among the worst-hit in the global sell-off that was triggered in late May after the US Federal Reserve signalled a possible reduction in its stimulus program. The announcement sent investors racing out of risky Asian bets, in turn dragging most equity indexes and currencies in the region lower. But analysts said markets have largely priced in the Fed’s shift in policy and the U.S. dollar stood to gain little when the stimulus tapering eventually happens. The poll of 65 currency strategists and economists over the past week showed all nine emerging Asian currencies were expected to appreciate in the next year, with the Philippine peso and Indian rupee expected to lead with over 4% gains. The peso has lost some 5.4% and the rupee is the worst performing currency in Asia ex-Japan so far this year. But while large remittances and inflows, along with strong economic fundamentals, have kept investors bullish on Philippines, India’s gaping current account deficit and policy inertia have caused large scale fund outflows from the country. “The general picture is that of US dollar strength,” said Leong Sook Mei, ASEAN Head of Global Markets Research at BTMU. “But, since the Fed has signalled that there is a possibility of tapering in its quantitative easing program, the selling should stabilise and the US dollar may give back part of the gains.” A majority of analysts expect the Fed to start tapering its bond buying program sometime in the fourth quarter this year and put the amount of the first cut at $20 billion. Analysts were however split on which type of bonds the Fed would buy less of with the consensus equally split among treasuries and mortgage backed securities. The Fed has pumped trillions of dollars into the economy to aid job creation and spur growth, weakening the U.S. dollar and forcing investors to seek high yielding assets in emerging markets. Those flows will likely reverse now that the US economy is seen gaining traction and growth in Asian powerhouses, China and India, sputters. China’s yuan will probably weaken further against the dollar this month if the economy shows further signs of slowing, before resuming gradual appreciation that should see it gain more than 1 percent over the next 12 months the poll showed. Once a favoured destination among investors for its high interest rates and resultant investment returns, Asian assets have begun losing their edge with the yield differential narrowing between them and those in the US. “For emerging markets to do better, they have to deliver higher growth or higher yields to compensate for the higher risk. Right now Asia isn’t doing good economically and US yields are increasing,” said Zeng Zheng, head of Asia strategy at SEB. Indeed, US benchmark 10-year Treasury yields have surged by over 50 basis points on expectations the Fed will begin to taper its bond buying program. That does not bode well for Asian currencies which benefited earlier from inflows seeking higher than the close-to-nothing returns in developed economies. The poll showed the Thai baht, Malaysian ringgit, South Korean won and Singapore dollar will each claw out small gains of over 3 percent in the next year after being battered recently.

“Even though the emerging market selloff has stabilised, because nearly every other G10 currency will continue monetary accommodation of some form, the dollar by default stays supported in the short term,” Sook Mei added. A similar poll published on Wednesday showed the dollar is set to rise against major currencies, reflecting a global shift away from emerging markets.