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October 6, 2013 4:27 am
For investors in Asia, May feels like a lifetime ago. At the start of the month, economists warned that the strength of many regional currencies was beginning to take its toll on local economies. Some – such as the Philippine peso and the Thai baht – were at record highs against the US dollar, thanks partly to the flow of easy money from the west.
The prospect of further inflows as the Bank of Japan stepped up its own quantitative easing programme prompted talk of capital controls to keep hot money out.
But then came the turnround. On May 22, Ben Bernanke, the Federal Reserve chairman, first mentioned “tapering” – a reduction in the US central bank’s asset purchase scheme. The initial impact was a wholesale sell-off in emerging market currencies, taking in almost all currencies in Asia.
The currency correction was “necessary and required” as part of the process of economic rebalancing, according to Sacha Tihanyi, Asia forex strategist at Scotia Bank.
“Currencies are not supposed to keep going in one direction for a sustained period of time,” he says. “The ‘taper talk’ actually exposed a lot of issues that a few years of very loose monetary conditions helped to paper over.”
Those issues rapidly became the focus for investors in India and Indonesia, countries that run large current account deficits. Over the summer, the rupee and the rupiah sank as much as 20 per cent. Both countries introduced emergency measures to prevent a currency crisis, while Indonesia opted to raise interest rates several times in a bid to stem capital outflows.
Other southeast Asian countries, many with brighter economic prospects, have seen dramatic falls. From the May peak, the Thai baht has dropped 9 per cent, while the Malaysian ringgit has slipped 10 per cent. Even the Philippines, with its strong growth fundamentals, has not been immune.
Many Asian currencies have found their feet in the past few weeks, rebounding against the US dollar and soothing fears of an impending balance of payments crisis in parts of the region. However, the summer swoon has raised doubts over the long-held view that Asia is in the middle of a multiyear process of currency appreciation, and has highlighted some of the region’s economic frailties.
Kevin Lai, an economist at Daiwa Securities, believes currency weakness will continue across Asia in the coming months, as countries are forced to deleverage and tackle rising bad loans taken out when interest rates were at rock bottom. In his view, the Fed’s decision not to taper in September has merely delayed the inevitable.
Others believe the reversal of years of loose monetary policy will lead to a more nuanced approach to Asian currencies, and clearer winners and losers.
“There was a time when [forex in] Asia excluding Japan was moving in a block formation, like a school of fish. One reason was [loose] monetary policy, and one was that the state of play outside Asia was so ugly. But as we started to see the US do a bit better, we started to see more differentiation”, says Mr Tihanyi. “For some of these countries, the warts are a bit more obvious.”
Hamish Pepper, forex strategist at Barclays, points to the Philippine peso and the Malaysian ringgit as currencies that have been “hard done by” in the summer sell-off, and says the economic strengths of both countries could soon lure investors back.
Currencies viewed as more closely linked to growth in the US and China are set to benefit, says Mr Pepper, as the world’s two largest economies show signs of recovery. “Even if you do get another sell-off in emerging markets, these are the currencies that will do well as investors rotate away from south Asia.”
But for others – such as India and Indonesia – the worst may not be over. Both countries suffer from economic problems that are “hard to turn around quickly”, says Mr Pepper. The lesson for investors from the summer is that the days of treating Asian currencies as a single block could be drawing to a close.
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