FROM RGE * YTD Currency performance as of Mar 6, 2009: Worst-performers->S.Korea (-18.7%), Malaysia (-7.3%), Singapore (-7%). Depreciated->India (-5.8%), Thailand (-3.6%), Indonesia (-5.9%), Philippines (-2.5%), Pakistan (-2%), Taiwan (-5.6%), Hong Kong (-0.08%), China (-0.2%), Vietnam (+0.1%)
Causes:
* Slowing capital flows: Heightened global risk aversion and investor redemption from EMs, bond and equity sell-off by FIIs and capital outflows from Asia; liquidity crunch amid money market turmoil; strengthening of USD. Unwinding of foreign currency debt by domestic entities; unwinding of carry trade. Aggressive interest rate cuts and low possibility of allowing appreciation in near-term are also deterring inflows. FDI is showing signs of easing amid global credit crunch. External bank borrowing and capital raising activity in international capital markets have also taken a hit
* Easing external balances: exports are contracting in all emerging Asian countries due to global recession, with most exports bound to US/EU. EMs are slowing significantly and China's imports for re-export are also slowing. Commodity price correction is hurting exports of Malaysia, Indonesia, Vietnam which benefited from 2008's commodity boom. High oil and commodity prices and strong domestic demand in 2008 had also put pressure on commodity importers. But countries with stronger FDI prospects and/or stronger fiscal and current a/c positions are less vulnerable to currency depreciation than their peers. Also, imports contracting (slowing industry, imports for re-exports, consumer demand) greater than exports in some countries is containing risks to the trade deficit
* Central Banks: To prevent large currency depreciation, central bank intervention in FX markets like India, S.Korea, Thailand, Philippines, Indonesia has increased in recent months leading to a decline in forex reserves. For countries with smaller reserves, intervention might be limited ahead. Some central banks also injecting dollar liquidity, arranging USD swap agreements with Fed and introducing other restrictions on converting currency in domestic markets. Some central banks are also easing foreign capital inflows, restricting USD outflow and currency conversion. Contracting exports is also causing several Asian central banks shift to depreciation bias to support growth esp. as interest rates cuts are approaching low levels in many countries with risk of deflation and are ineffective to stimulate lending, and size of fiscal stimulus is constrained by fiscal deficit in many countries
* Risks: Currencies will face downwards pressure since exports will continue to contract through most of 2009 and foreign investor risk aversion will also continue esp. as risks to Asian growth escalate. FDI, remittances and debt inflows incl. bank borrowings will be hit more than expected. Depreciation bias will instead raise import cost for firms and consumers, and impact trade balance and import inflation
Outlook:
* With many currencies (most notably KRW and INR) having already reverted back to where they stood at the start of 2002, the pressure on currencies shouldn't prove as extreme from here on
* ANZ: Although risk aversion and debt redemptions remain an immediate hurdle for KRW, USD-KRW will lead USD-AXJ lower later in 2009. Singapore's monetary policy to re-centre and widen the S$NEER policy band would pave way for further gains in USD-SGD. Further gains are assured in USD-TWD with staggering drop in exports, record contraction in GDP, and bleak outlook
* Scotia: Depreciation trend will be reversed in the latter part of 2009 if China resists internal pressures to devalue the renminbi; Fiscal stimulus, rising savings will limit capital outflows that have pressured the exchange rates; Developing Asia may be convinced they cannot rely on export-led growth models; implications of the U.S. financing requirements
* Morgan Stanley: AXJ currencies most vulnerable amid significant risks to growth and capital outflows in near-term but will rally once global economy bottoms; fiscal rather than monetary stimulus (rate cuts) to contain crisis and slowdown will support the currencies. Sharp depreciation of currencies against USD (except those with large current a/c surpluses) has caused dislocations in balance sheets of many companies and countries with external liabilities
* Standard Chartered: Given the fundamentals are solid and growth prospects are bright, KRW, PHP, INR, IDR to lead the rally in AXJ currencies in H2-2009 just as they led the AXJ currency correction in 2008. Small, open economy currencies such as SGD, MYR, TWD,THB, VND will weaken on slowing growth, capital outflows, global recession
* Credit Suisse: Countries most exposed to G-3 (Taiwan, Singapore, Malaysia, S.Korea) will witness more depreciation relative to those less exposed to G-3 (India, Indonesia, China, Philippines, Thailand)
* ABN Amro (not online): Taiwan, Malaysia, Thailand will perform better due to current a/c surplus, lower capital dependence; India, S.Korea, Vietnam will weaken as high import bill impacts current a/c deficit
* DBS: Singapre dollar is facing the strongest technical pressure to depreciate, based on the recession and the fact that Singapore manages its currency against the euro which has also weakened
Mar 7, 2009
