Craig Chan
Executive director and head of foreign exchange strategy & fixed income division (Asia ex-Japan), Nomura
Nomura believes one of the FX underperformers in Asia in an environment of slower Chinese and European growth will be the Korean won. We forecast the USD/KRW currency pairing will reach KRW1,120 by the second quarter. Korea’s exports to China as a percentage of total exports are one of the highest in the region at 24.3% and a China slowdown will raise the risk of Bank of Korea shifting monetary policy to an ease. This could happen after South Korea’s parliamentary elections on April 11.
Nomura’s analysis also shows that as exports slow, the won returns weaken, and weak exports also lead to increased FX intervention. Our view is a recession in Europe along with debt sustainability and political concerns could also impact Korea through the financial channels given the potential deleveraging or repatriation impact.
Eurozone bank lending to Korea was at US$53.6 billion – 5.2% of gross domestic product (GDP) – in September 2011. Nomura believes the Singapore dollar can show some performance versus the US dollar with our second quarter forecast of SGD1.23. Although Singapore is an open economy and its growth will be impacted by a slowdown in China and Europe, we believe the Monetary Authority of Singapore’s (MAS) policy bias will be for no change in the Singapore nominal effective exchange rate appreciation policy in April.
This may not be a broad consensus view and our reason is that inflation in Singapore remains high relative to history with core inflation at 3.5% in January. The recent budget measures, particularly restrictions on foreign labour, also suggest inflation being stickier and MAS remaining on hold in April.
Mitul Kotecha
Managing director and head of global foreign exchange strategy, fixed income markets research, Crédit Agricole
Although Asia, with the help of China, will look comparatively good in terms of economic growth compared to the G7, the region will still slow somewhat, especially as Asia is still quite exposed to the global economic cycle. We expect Asian GDP to slow to around 6.6% this year, which compares well to 1.8% and 0% for the US and eurozone, respectively.
Currency markets will not be able to avoid some impact of slowing growth but at the same time we do not expect it to prove disastrous for Asian currencies. The purchasing managers index (PMI) reached a high in January 2011 but has weakened since, reflecting the worsening prospects for the global economy. The good news is that some Asian currencies do not possess a statistically strong relationship with the PMI.
Of those that will react, the most sensitive is the Indonesian rupiah followed by the Korean won. Perhaps surprisingly, given the relatively closed nature of its economy, the Indian rupee registered a statistically strong relationship. This may reflect the fact that it becomes more difficult to fund the country’s current account deficit when growth slows. Unsurprisingly, given the strong trade orientation of Singapore’s economy, the Singapore dollar reacts negatively to a weakening in the global PMI. Against this background we expect Asian currencies, even the ones that are sensitive to the global growth cycle, to appreciate this year.
Perry Kojodjojo
Foreign exchange strategist, HSBC Global Research
We expect the majority of Asian currencies to appreciate against the US dollar. However, we believe the path is likely to be less linear and less rapid through the full year than seen in early 2012.
Globally, the market is already pricing in a notable slowdown in global growth, including in Asia. However, the data has been better than expected and our economists still expect Asian growth to remain well supported relative to the developed world. This is at least in part due to authorities in Asia having the ability to provide further stimulus – fiscal and/or monetary – if growth weakens more materially.
For Asian FX to underperform notably against the US dollar we would need to see a material decline in the data relative to expectations; then the consensus would once again turn more pessimistic. In turn, this would provide formidable resistance to Asian currency strength, especially given their sensitivity to US and global growth cycles.
For now, we prefer to own the Singapore dollar, Malaysian ringgit, Chinese renminbi and Korean won against the US dollar, while the Indonesian rupiah, Indian rupee and Vietnamese dong are our least favourite Asian currencies.
The members of the first group provide quality through their large external surpluses and high levels of reserve cover, which can act as a buffer if markets become more volatile. Although the rupee and rupiah are less exposed to global growth, the ongoing deterioration of their current account balances is likely to make the currencies more vulnerable if global financial conditions worsen.
Thomas Harr
Head of Asian FX strategy, Standard Chartered
There is a strong relationship between the global industrial production (IP) cycle, and the performance of Asia ex-Japan (AXJ) exports and currencies. The global industrial production cycle is recovering. The US ISM manufacturing index (US ISM) rose to 54.1 in January 2012 from 53.1 in December 2011.
In Asia, February manufacturing PMIs for China and Korea rose to 51.0 and 84 respectively, from 50.5 and 81 previously. There is now more evidence that the global IP cycle has recoupled – the recovery in the US ISM, which bottomed at 50.6 in August 2011, has gradually spread to Asia.
The US ISM leads Asia export growth by two to three months. The US ISM has a high positive correlation with Asia ex-Japan FX performance, particularly the Korean won, Malaysian ringgit and the Indian rupee. In addition, the index leads the ringgit, Taiwan dollar, Thai baht, P hilippine peso and Singapore dollar. In contrast, the Chinese renminbi and Hong Kong dollar are negatively correlated with the US ISM.
The recovery in the US ISM provides near-term support for cyclical Asia ex-Japan currencies such as the ringgit and won whereas it is a short-term negative for the renminbi and Hong Kong dollar. However, the deterioration in the new orders/inventory balance in the US ISM suggests that we are close to a peak, which may be negative for Asian currencies in the second quarter, particular for cyclical currencies such as the ringgit and Philippines peso.
Teck Leng Tan
Asian currency strategist, UBS Wealth Management Research
Most Asian countries experienced a GDP growth slowdown or contraction in the final quarter of 2011 amid a heightened European sovereign debt crisis. That said, recession fears in Europe have abated substantially after the European Central Bank averted a liquidity crunch in the interbank market by lending €489 billion (US$644.84 billion) to European banks via its three-year long-term refinancing operations. This has helped Asian currencies recover much of their respective weaknesses against the US dollar since last December.
Nonetheless, their appreciation potential for the next 12 months is still constrained by a moderate global demand outlook.
While export-oriented Asian countries are typically more guarded against currency appreciation, monetary authorities in Singapore and South Korea have recently expressed that inflation risks are a greater concern than economic growth. Thus, we believe the authorities in these two countries are more likely to welcome further currency appreciation to cushion the inflationary impact of higher import prices.
On the other hand, central bank officials in Thailand and the Philippines continue to place greater priority on economic growth than the threat of inflation; thus, we see lower appreciation potential for the Thai baht and Philippine peso.
Economies that are less reliant on export demand such as China and Indonesia should be less resistant to currency appreciation; hence, we expect their currencies to be largely stable or to appreciate only mildly to guard against imported inflation.
While India's domestically driven economy is also less exposed to overseas demand, the rupee is particularly susceptible to depreciation due to India's heavy consumption of imported crude oil, leading us to avoid this currency amid rising crude oil prices.