Oct 03, 2014

    Regional currencies set to rise in the year ahead


    EMERGING Asian currencies will rise a little over the next year on improved economic activity, although the United States Federal Reserve's anticipated policy tightening could limit gains, a Reuters poll showed.

    Almost every major Asian currency, except the Thai baht, has had a dismal year so far, with the Taiwan dollar, Chinese yuan and Philippine peso leading losses.

    Analysts polled by Reuters over the past week, however, predict most currencies will gain slightly or hover around their current levels in a year's time.

    The South Korean won is forecast to gain the most, over 2 per cent, followed by a 1.8 per cent appreciation in the yuan and a 1.5 per cent rise in the Indian rupee.

    Recent economic data has largely failed to impress, and business surveys on Wednesday showed factories across most of Asia lost steam last month due to waning demand. South Korea's manufacturing sector shrank for the first time in three months.

    Still, expectations of better economic performance in China, India and other major economies will likely help in retaining investor interest. "China has recorded some pretty sizeable trade surpluses over the past few weeks and will probably have some appetite to allow its currency to appreciate slowly," said Benjamin Reitzes, senior economist and vice-president at BMO Capital Markets.

    The Chinese yuan is expected to trade at 6.10 to the US dollar in three months, 6.08 in six months and 6.03 in a year. It last traded at around 6.14.

    That would reverse the downward trend seen in the currency earlier this year when the People's Bank of China sold the yuan in order to break the one-way trend of appreciation and encourage volatility.

    But China is in the midst of restructuring itself into a consumer economy and that experiment has led to growth falling to its lowest level in almost a quarter century.

    Rising risks of a crash in its housing market have also prompted policymakers to ease home buying restrictions, as well as introduce targeted stimulus for builders and some banks. "The likelihood of more stimulus is pretty solid. The question is how they achieve it without distorting their economy or pushing the housing market," said Mr Reitzes.

    The poll also showed the Indian rupee is likely to trade at 61.25 to the US dollar in one month, 61.50 in six months and 61.00 in a year. It was last at 61.65.

    "The rupee has proved to be quite sensible to developments in international markets, particularly the US Fed's actions," said Hanna Luchnikava, South Asia economist at IHS Global Insight. "We might see some selling pressure but India's balance of payment position is much more sustainable and capital inflows remain pretty buoyant following elections."

    The Thai baht and Indonesian rupiah, meanwhile, are expected to continue to weaken, reaching 33.00 and 12,200 respectively by September next year.

    The rupiah hit an eight-month low on Tuesday and was on track to lead monthly losses in Asian currencies, which have taken a hit as investors position themselves for an eventual rise in US interest rates.

    The baht was bid at 32.35 yesterday and the rupiah at 12,125.

    The Fed is on track to end its stimulus this month and is expected to start raising interest rates by the middle of next year.

    That could stall Asian currencies and lead to a sell-off if investors rush out of emerging-market assets. "The severity of the impact would be different for different currencies, but almost all Asian units are likely to take a hit once the Fed starts raising rates," said Amy Zhuang, an analyst at Nordea.

    Most emerging markets were caught off-guard last year as investors dumped assets there after the Fed signalled it would begin cutting back on its US$85 billion (S$108 billion) a month stimulus purse.

    Although analysts said emerging markets are better prepared this time round, the possibility of a steeper rise in US bond yields is likely to dampen the appeal of higher-yielding Asian currencies and assets.