How has the dollarÆs recent boost affected Asian currencies? Have any in particular been hit hard or shown themselves to be particularly resilient?
Deutsche Bank's index of Asian currencies versus the US dollar (the db EARLY Index) has fallen around 8% from its peak in April. The weakness has been fairly broad based, though the Korean won has weakened twice as much as the regional index. On the other hand, the Chinese renminbi û due to the managed float with reference to a basket of currencies û has not been affected as much.
Do you think increasing evidence of a global slowdown could provoke capital outflow from Asia? If so, how will that affect regional currencies?
ItÆs important to distinguish between foreign direct investment inflow and portfolio flows. FDI inflow trends tend to be less cyclical and we expect these to continue relatively unabated.
Regional stock markets have obviously been affected by a weaker global economy and falls in major global indices. As such, money has flowed out of the region and - to the extent that investor sentiment is affected by broader perceptions of growth and corporate earnings momentum - this could continue.
However, it is important to note that net external assets of Asian investors have also grown in recent years, particularly in Taiwan and Korea. The foreign capital outflows from these countries would therefore be partly offset by the repatriation of funds from loss-making investments in foreign markets by local investors.
On balance, we believe the likely trajectory of capital flows may remain negative for local Asian currencies into next year.
Has the recent political trouble in Thailand affected the baht or are other factors more influential?
We havenÆt seen speculative outflows in the baht due to the recent political development. Thanks to the Bank of ThailandÆs efforts at reducing volatility and little overhang of speculative positions or short-term debt, the baht has performed no worse than the regional index.
Do you see things picking up for the won?
There has been a lot of commentary surrounding the fall in the Korean won since July. We disagree with some of the more negative views being drawn.
Because there is a large stock of foreign currency debt in Korea that needs to be rolled almost continuously, the global US dollar funding squeeze from the ongoing credit crisis tends to expose the won to sharp fluctuations. In attempting to smooth such fluctuations, the Bank of Korea presently sells spot reserves. Another approach which may be effective would be for the central bank to consider "lending" dollars to the market through FX swaps.
US dollar funding may continue to be an issue going into year-end as foreign banks look to consolidate their balance sheets, which may put further pressure on the won. So unless credit markets stabilise, these pressures should continue.
How is the renminbi appreciation affected by the dollar's recent gains?
The appreciation of the renminbi versus the US dollar has virtually ceased. However, because of the broader strength of the dollar, in trade-weighted terms the appreciation of the renminbi has accelerated sharply.
Is there a currency safe haven in Asia? How can investors with an interest in Asian currencies minimise their risk?
On standard metrics such as purchasing power parity (PPP) or real effective exchange rate (REER), Asian currencies are not as fundamentally over-valued as many of their G10 counterparts. That is not to say they are insulated against dollar strength, although they are likely to depreciate less against the dollar compared to G10 currencies. One of the issues for Asian currencies is that many had thought that currencies like the Singapore dollar, the Malaysian ringgit, the Taiwan dollar and the renminbi would be insulated from dollar strength. And with those views proving wrong, we could see participants such as high-net-worth investors who æparkedÆ their money in these currencies switching back into dollars.
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