Won, ringgit see best day in 11 months; caution over more gains

SINGAPORE: The South Korean won and the Malaysian ringgit posted their best gains in 11 months on Thursday, leading other emerging Asian currencies higher, as investors returned to riskier assets and the euro rebounded above a key pivot level.

Short-term speculators entered fresh dollar-short positions against emerging Asian currencies, despite lingering worries about the euro zone's debt crisis with Greece fighting to avoid a debt restructuring that could have a huge ripple effect across other European countries struggling with gaping fiscal deficits.

Any fresh negative news from Greece and other debt-ridden euro zone members may sour sentiment again, analysts and dealers said.

"Considering the price action and how rapidly EUR has rebounded, it is positive. But nothing really fundamental has changed. It seems good enough for a solid risk bounce today, however, but the overall environment has not necessarily turned," said Sacha Tihanyi, senior currency strategist for Scotia Capital in Hong Kong.

"I'd not advise being short term 'short risk' in this environment, but I do know that the moment a EUR-negative headline hits, we could see positive sentiment unwind in a hurry."

Emerging Asian currencies have suffered corrections and profit-taking this month on weaker commodities and a softer euro, after enjoying strong inflows during the first four months.

The rebound in the euro, especially a move above a key pivot level of $1.4150, may help the regional currencies, but it is premature to conclude an end of corrections yet, dealers and analysts said.

"EUR will head towards 1.4300 before testing lower again as we approach the end of the week. As such, USD/AXJ should be trading with an offered tone for the next 2 sessions but do not get too carried away holding USD shorts as this looks like a short term move only," said a head of emerging Asian currency trading at a European bank in Singapore.

"Month-end real money flows should be buyers of USD against the majors."

But the corrections in the emerging Asian currencies would be modest as US real money accounts remain bullish on them, Standard Chartered said.

Real money funds are likely to hold onto long positions in the regional units, barring a sharp slowdown in the global economy or a financial shock such as a "hard" Greek debt restructuring, it said in a note.

The won posted its biggest daily percentage gain in 11 months as local interbank and offshore funds cleared dollar-long positions to stop losses.

Some players entered fresh dollar-short positions as foreign investors turned to net buyers of Seoul shares after selling of ten consecutive session.

Exporters also bought the South Korean currency for settlements.

The won closed local trade up 1.24 percent against the dollar, the largest since June 21, 2010.

On Wednesday, the local currency threatened to weaken past a major support line of 1,102 of its highs versus the greenback during November-February.

With the Thursday's gain, the support line becomes stronger and the won may strengthen more if the euro rebounds more.

Still, dealers are reluctant to buy it more aggressively as the won finds some resistance lines around 1,083, such as the 20-day moving average.

"If the trend (of a firm euro) persists, the won will rise more. But markets will get more volatile as US data is not that healthy and caution over the end of QE2," said a foreign bank dealer in Seoul.

The ringgit also poised to post its biggest daily percentage gains in 11 months as short-term speculators entered dollar-short positions and on stop-loss dollar sales.

The Malaysian currency also found support from demand linked to fixing.

The ringgit gained 0.8 percent against the dollar, the biggest daily gain since June 28 last year.

But a Kuala Lumur-based dealer doubted if the ringgit would rise more, adding the euro must rise above $1.42 and the Australian dollar also must gain above $1.06.

The Singapore dollar gained as overnight US dollar long positions were bailed out when the city-state currency strengthened past 1.2460 per the greenback.

Copyright Reuters, 2011