THE recent rally in Asian currencies has brought about some cheer in what has been an otherwise lacklustre equity market. While the weakness in the US dollar has played a big part in the appreciation of Asian currencies, economists said the strengthening in Asian currencies are more likely due to a rebound in capital inflows to the region.
Asian currencies advanced, led by Thailand's baht and South Korea's won, on merriment that rising interest rates will attract funds to regional assets.
The baht rose to a one-week high after opposition Puea Thai Party gained control of parliament. Prime Minister Abhisit Vejjajiva and the defence minister acknowledged an election victory by allies of exiled former premier Thaksin Shinawatra.
The baht climbed 1%, the most since Feb 29, 2008, to 30.49 per dollar yesterday. On Tuesday, it closed at 30.49 to the dollar.
In South Korea, the government raised its 2011 inflation estimate by a percentage point to 4% last week, while trimming its economic growth forecast to 4.5% from 5%.
The ringgit rose to a four-week high at US$1 to RM2.995 on Monday, as nine of 14 economists in a Bloomberg survey forecast Bank Negara Malaysia would lift its overnight rate by a quarter of a percentage point to 3.25% tomorrow.
The Korean won is trading around its lowest level against the US dollar since Aug 22, 2008 at 1,048 won. It closed Tuesday at 1,066.15 won.
Not surprisingly, emerging markets have seen inflows in both equities and bonds. Led by Taiwan, Asia equities took in US$2.4bil as at the end of last week.
For emerging market equities as a whole, there was a net inflow of US$2.3bil, the strongest since mid-April.
However, the end of Quantitative Easing 2 in the United States suggests that the downside risks for the US dollar will likely lessen. A potential recovery in the US dollar over the second half of the year may stand in the way of strong Asian forex gains.
On the global front, Asian currencies are robust in the wake of increasing risk appetites following the approval of Greece's austerity measures.
The Bloomberg JP Morgan Dollar Index (which is an index of Asian currencies) is approaching close to breaking its May 2 high of around 119.26, which is also its highest level since August 1997. Yesterday, it was last traded at 118.97.
Meanwhile, the ringgit rose to a four-week high at US$1 to RM2.995 on Monday, as nine of 14 economists in a Bloomberg survey forecast Bank Negara Malaysia would lift its overnight rate by a quarter of a percentage point to 3.25% tomorrow.
Five predicted that the monetary authority would leave borrowing costs unchanged. Exports rose 11% in May from a year earlier after increasing 11.1% the previous month, the most since July 2010, economists predicted in a separate survey ahead of Government data due tomorrow.
Globa currencies - AFP
An analyst from The Royal Bank of Scotland expects Bank Negara to lift its overnight policy rate by another 25 basis points to 3.25% on Thursday.
“Another 1% hike in the statutory reserve requirement ratio (SRR) is also likely to reduce excess liquidity, bringing the SRR back to pre-crisis levels of 4%,” said the analyst in his July 4 report.
Meanwhile, Asia ex-Japan's growth is poised to remain healthy, with the Chinese economy envisaged to remain resilient.
“We expect the Chinese inflation to peak in July or August, implying there may not be any further monetary tightening after a possible 25-basis-point hike on the one-year benchmark rate now at 6.31%. Apart from the past rate hikes, softening global prices, easing property prices and gradual appreciation of the yuan have eased inflationary pressure,” said MIDF economist, Anthony Dass.
Malaysia has outperformed regional's appreciation against the US dollar.
“Underpinned by a positive economic outlook and favoring interest rates differentials, we expect liquidity inflow to remain strong into Asia ex-Japan, including Malaysia,” said Anthony.
Dass expects Bank Negara to raise the SRR by another 50 basis points to 100 basis points from 3% now to address liquidity inflow while OPR is poised to increase by another 25 basis points from the current 3% to contain inflation.
Dass said that while the strengthening ringgit would shrink some firms' profits, it paved way for other growth opportunities. Lowering import cost of inputs and capital will facilitate firms' transformation from labour to capital intensive production. It will raise productivity and profits and result in higher wages and more vibrant labour market with a larger pool of highly skilled workers.
“Higher wages in turn will boost domestic consumption and spur non-tradeable sectors performance. It will re-orientate the economy from trade-dependent to domestic demand-driven,” he said.