Won, ringgit fall as risky assets retreat

SINGAPORE: Emerging Asian currencies fell broadly on Monday, led by a drop in the South Korean won, after weak US jobs data last week revived US recession fears and stirred worries of knock-on effects on Asian economies.

The Indonesian rupiah took in its stride data showing that Indonesia's consumer price index (CPI) and core CPI rose faster than expected in August, with market players saying the data was unlikely to prompt an interest rate rise in the near term.

The increase in CPI stemmed from a rise in food prices during the Ramadan fasting season, while a sharper-than-expected rise in core CPI appeared to have been largely caused by higher gold prices.

The CPI data underscored market expectations for Indonesia's central bank, Bank Indonesia (BI), to keep interest rates unchanged at 6.75 percent at a policy meeting on Thursday.

"BI is likely to stand pat for this year, as headline CPI is expected to fall within its inflation target," said Andy Ji, Asian currency strategist for Commonwealth Bank of Australia in Singapore.

Analysts said Asian currencies could face some weakness in coming months, dogged by worries about the outlook for their economies.

"Recent data from Asia itself have been largely disappointing. We may have to wait for late Q3 or Q4 for the expected rebound in economic activity following the Japan quake," said Frances Cheung, strategist for Credit Agricole CIB in Hong Kong.

"Towards the year-end I would expect Asian currencies to stabilise. Overall Asia should still be resilient but cannot escape the global turmoil," Cheung said.

Such headwinds against emerging Asian currencies, however, could be offset to some extent, if the dollar weakens on market speculation about the possibility of further monetary easing from the US Federal Reserve as early as September.

"My view is the fundamental support to (Asian) currencies is subsiding undoubtedly and for the remainder of the year their performance will hinge largely on how much the dollar weakens," said Commonwealth Bank of Australia's Andy Ji.

The South Korean won , the Malaysian ringgit and the Indian rupee led the fall in Asian currencies, with the won falling roughly 0.5 percent against the dollar to 1068.70.

WON AND YUAN

Some analysts still see scope for Asian currencies to rise in the next few months.

Analysts at Nomura said they were adding to their short USD/CNY position and keeping their short USD/KRW bet, given that calls for Asian authorities to allow more exchange rate flexibility may increase in coming months as was the case around the same time last year.

"President Obama's 8 September jobs' speech may provide a sense of how much the US cares about FX at the highest level - it is possible he may even revisit his 2010 State of the Union pledge to double exports in five years," the analysts said in a research note, adding that they think USD/CNY can fall to 6.3 in the next two months.

The US Treasury Department's foreign exchange report expected in October, could also contain language calling for greater exchange rate flexibility from China and South Korea, they said.

"In general, we believe the pressure this year may be as great as it was last year. After all, US growth is faltering, US policy options are limited and we are approaching the 2012 presidential election," the Nomura analysts added.

RINGGIT

Financial market volatility and risk-off spells could push the dollar higher against the Malaysian ringgit this month, unless the US Federal Reserve adopts additional monetary easing steps at its Sept. 20-21 policy meeting, said Saktiandi Supaat, head of FX research for Maybank in Singapore.

"This week may see some swings to the upside on dollar/ringgit if the economic data and central bank announcements and rhetoric are negative," he said.

Maybank sees Malaysia's central bank keeping interest rates unchanged at 3 percent at its policy decision on Thursday, and expects the central bank, Bank Negara, to raise interest rates in November.

So unless the Fed eases this month, downside moves in dollar/ringgit based on interest rate differentials seem more likely to occur after later in the year, he added.

RUPEE

Dollar traded up to 45.96 vs the Indian rupee on short-covering interest on the back of heightened risk aversion. Dollar selling by Indian exporters ahead of resistance at 46.00 capped the dollar's rally, however.

Copyright Reuters, 2011