Asian currencies: Low sense of direction

After a strong start to 2012, Asian currencies have been stuck largely in a range for the last few months. Directional trading has been difficult, and aside from Indian Rupee (INR) and Indonesian Rupiah (IDR) weakness – where we have highlighted vulnerabilities for some time – most Asian currencies have been moving broadly sideways versus the USD for some time.

One reason for the lack of better direction in Asian currencies has been the continued volatility in the underlying macro backdrop. Take for example the volatility in US treasury yields, which rose sharply following a more hawkish FOMC in March, only to fall back again following a weaker payrolls release.

Beyond this is the fact that recent shifts in the macro backdrop themselves had an ambiguous implication for Asian currencies. We had argued before how higher oil prices and higher US treasury yields had a path-dependent relationship with Asian currencies.

For the time being, we believe the key challenge will be finding the right funding currency and managing the greater volatility. In the medium term however, we continue to expect Asian currency appreciation this year. There is still underlying weakness in the US economy and the market might have over-reacted in terms of expectations of a Fed exit strategy. Weaker payrolls data from the US puts this idea back in the limelight and it still seems likely the Fed will embark on further easing in the latter part of this year. Meanwhile we are expecting a stabilization and reacceleration in China and Asia more broadly this year. However, if there continues to be near-term volatility in the macro backdrop, Asian currencies will trade with similarly greater volatility versus the USD. Source: Currency Outlook, HSBC Global Research, April 2012