The Business Times
By Oh Boon Ping
WHILE 2009 is often remembered for the unexpected economic rebound, the period also saw significantly higher volatility in the foreign exchange markets as the selldown in stocks swiftly hit the currency markets full-force.
This year, as confidence in the economy grows while market fear ebbs, money is once again moving out of safe investments and back into emerging markets, which are getting out of the crisis more quickly and stronger than the mature economies.
In this environment, BT polled four strategists on the regional currencies that are poised to outperform, and the key factors that will drive FX movements here in the next 12 months.
Nizam Idris, executive director, emerging markets strategy, UBS
Top performers
The Indian rupee, Indonesian rupiah, Philippine peso and Malaysian ringgit.
Key issues that will affect regional currencies in 2010
The Asian economies are seeing large fund inflows as global economic recovery continues, while major central banks are not withdrawing liquidity in a big way just yet.
But Asian central bank's mercantilistic tendencies will remain a hindrance for larger currency appreciation. Beyond this period and for the rest of the year, the threat of inflation and how central banks handle this threat, even as the sustainability of the global recovery remains questionable, could be the major factor in picking currency outperformers in Asia this year.
In the shorter of the two time horizons, we think that the Indian rupee, the Indonesian rupiah, Philippine peso, Malaysian ringgit and Indonesian rupiah are likely to outperform currencies that have held up well through most of the crisis such as the Singapore dollar. For this time-frame, our top picks are the Indian rupee, Korean won and Indonesian rupiah.
For the second half of the year, the key to relative currency performances would be determined by the pace of the global recovery and how Asian central banks handle the likely rise in inflationary pressure.
We believe that the diminishing incentives to intervene in the FX market in the face of rising imported inflation and its low dependence on exports for growth would still make the Indian rupee a good currency to hold. India needs a stronger currency to curb food and imported inflation.
Some inflation could also be supportive for the Korean won. The Bank of Korea is arguably the most credible inflation targeter in the region. It is likely to react aggressively to any threat of inflation with rate hikes and allow currency appreciation.
Philip Wee, senior currency economist, DBS Treasury Research
Top performers
Singapore dollar, Indonesian rupiah, Indian rupee.
Key issues that will affect regional currencies in 2010
Based on the data, the markets with the largest current account surpluses as a fraction of gross domestic product (GDP) were Malaysia, Hong Kong, Singapore, Taiwan and China and these are the currencies that have a tendency to track the dollar on a level basis, such as the Hong Kong dollar and the yuan, or the Singapore dollar, ringgit, new Taiwanese dollar which tracks the US dollar index fairly closely.
We expect China to resume its appreciation in the second quarter based on our expectation that the US and other central banks will start their exit strategies in Q3. Within this group, the Singapore dollar was the best performer for the medium term, and remains our top pick going into 2010 because Malaysia, Taiwan and Thailand were visibly more concerned about export competitiveness during the recovery.
Singapore's exchange rate policy is also expected to return to an appreciation stance in the second half of 2010, in line with the appreciating yuan policy and the exit strategies worldwide.
The two currencies - the won and the rupiah - that recovered most after the global crisis also happened to be the ones that suffered most. Between the two, we prefer to put our bets on the rupiah in 2010.
Indonesia embraces a weak US dollar more than Korea. The former uses this to support the rupiah during periods of weakness, while the latter complains about the appreciation pressures it exerts on its won. Indonesia's lower loan-to-deposit ratio also suggests more scope to boost domestic demand than Korea.
The rupee is likely to perform better than the Philippine peso. Although India has a current account deficit versus a surplus in the Philippines, the rupee should be supported by capital inflows and higher growth. Bets on the peso, which is supported by a strong international liquidity position, will be muted until we get a positive outcome at the Philippine presidential elections scheduled for May this year.
Patrick Bennett, Asia FX & rates strategist, Societe Generale
Top performers
Korean won and Taiwan dollar.
Key issues that will affect regional currencies in 2010
Some of the key drivers we see in the new year include the US Federal Reserve's views on the market and the risk of Asian bubbles. In particular, Asian policymakers are showing serious concerns that new bubbles are being blown locally, but have focused on local regulatory measures, such as well-targeted taxes, control of bank lending and capital requirements for now. Our focus in 2010, therefore, will likely be on policy signals.
The other drivers are reforms in financial regulation and the rise in sovereign risk.
We forecast that the Korean won will be the top-performing Asian currency as it remains sufficiently undervalued against its regional peers and export competitors.
The Taiwan dollar is the standout of the Asian currencies, positioned to outperform on leverage to China, and is a beta play on the global economic cycle if the global recovery extends in the coming months.
The currency posted a modest performance in 2009, gaining 2.9 per cent against the US dollar, including a 6.5 per cent rally off lows recorded in mid-March.
We forecast US dollar/Taiwan dollar to reach 31 in June and 30.5 in December 2010, with Taiwan dollar gains of 3.9 per cent and 5.6 per cent respectively.
Leong Wai Ho, economist, Barclays Capital
Top performers
Korean won, Taiwan dollar, Singapore dollar, Malaysian ringgit.
Key issues that will affect regional currencies in 2010
Obviously, continued strong balance of payments dynamics in favour of Asian currencies is a key factor of support for currencies such as the Singapore dollar and ringgit.
Meanwhile, the cross straits economic integration could lend additional support to Taiwan, while economic and political stability and improved fundamentals in Indonesia should benefit the rupiah.
Thirdly, the weather will play a more important role this year, as it leads to higher food prices. Indications from climatologists are that the weather in 2010 will mainly be warmer and drier and this is less favourable for crops/planting.
Given that policy makers are reluctant to tighten monetary policy at this stage of the recovery, given that growth conditions are still soft, we think the likely policy reaction will be to use the exchange rates to lean into such imported inflation pressures.
In Malaysia, the government is looking to divest state-owned enterprises, and the fiscal deficit is likely to surprise on the upside. But for foreign buyers biting into the divestment story, the currency should do well. Aside from Malaysia, India is also looking to divest assets and this could surprise on the upside.
One additional theme that will be slightly negative for Asia is the onset of a weaker euro, brought on by growing fiscal concerns in Greece, Spain and Ireland. This could limit the pace of appreciation in Asian currencies, but would be countered by the expected appreciation of an undervalued Chinese yuan.
This article was first published in The Business Times.
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