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Asian currencies were broadly mixed versus the dollar today, although underlying improvement in risk sentiment supported some units, with the South Korean won climbing on year-end position squaring. The retreat in Asian currencies “could be related to the Russian ruble falling off and leading to emerging markets risk-off and some contagion effect,” said Sean Yokota, Singapore-based head of Asian strategy at Skandinaviska Enskilda Banken AB. “Risk appetite is declining as oil prices are moving lower.” The Philippine peso edged higher, helped by strong year-end remittance inflows from overseas Filipino workers.
The speculation in the market is that another RM70 billion can be expected to flow out of the country given the weakening ringgit vis-à-vis the USD. This is mainly due to foreign investors winding down their positions in the bond market. Malaysia could be in recession if the outflow reaches 20 per cent of GDP, a remote possibility at this juncture, according to economists. The ringgit has been under pressure since August Brent crude oil closed below US$100 a barrel. Oil is now at US$60 a barrel and still falling, ready to test the next psychological barrier at US$50.
The Malaysian ringgit was an underperformer, pressured by dollar-buying by interbank speculators and local market participants. Market sentiment toward emerging market currencies had soured in the early part of last week after sliding oil prices triggered volatility across a variety of assets and as a plunge in the Russian rouble spooked investors. Malaysia's status as a net oil export means low world oil prices have put both its current account and fiscal deficit under pressure.
However, an upbeat economic assessment by the US Federal Reserve at last week's policy review helped calm market nerves, while the mood has also improved as oil prices and the rouble bounced from their recent troughs.
Still, market participants were cautious on the outlook for Asian currencies.
A trader for a Malaysian bank in Kuala Lumpur said there had been some dollar-buying for Asian currencies today, adding that "nobody" wanted to be short the dollar. Most emerging regional currencies have fallen against the dollar this year, as the greenback rose on the back of market expectations for the Fed to start raising interest rates some time next year. The dollar is expected to maintain its broad strength against Asian currencies over the next several months, said Leong Sook Mei, Asean head of global markets research for the Bank of Tokyo-Mitsubishi UFJ in Singapore.
“We still have a dollar/Asia upside profile for at least all of the way to the middle of next year,” Leong said.
Still, a recovery in the US economy will be positive for Asian economies, she said, adding that Asian currencies may find some support as a result. The year 2015 will be tough for Asian currencies and every single major currency will drift lower against the US dollar. The Indian rupee, however, will be one of the few currencies that will cope with the greenback strength better. That’s the takeaway from the latest report released by HSBC on expected forex trends in the next year. In the report, analysts write that the broad strength seen in the dollar in 2014, thanks to resurging growth and the expected wind-down of accommodative Federal Reserve policy, will continue into 2015. Despite the headwinds for Asian currencies, it said the impact of potential capital outflows would likely be muted because Asian central banks had sufficient foreign currency reserves to manage volatility in their currencies. It said narrower interest rate differentials were likely to result in less demand for Asian currencies in carry trades.
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