Baht, peso lead Asian FX rises; debt woes still weigh

SINGAPORE: The Thai baht and the Philippine peso on Tuesday led gains in their peers on continuous bond inflows to Asia, while investors remained reluctant to add more positions in the regional units on default threats in the euro zone and the United States.

US politicians are still far from reaching a federal borrowing deal by the Aug. 2 deadline and Europe also appeared no closer to agreeing yet on a second bailout of Greece ahead of Thursday's European summit.

Worries about debt-deals are expected to prevent investors from increasing exposure to riskier assets, including emerging Asian currencies, dealers and analysts said.

"AXJ's rebound is looking more like a 'dead cat bounce'... This recovery looks rather shallow, and very reflective of the market attempting to find some reprieve in Asian units given the uncertainty this week for the US and the euro zone," said Suresh Kumar Ramanathan, regional rates and foreign exchange strategist for CIMB Investment Bank in Kuala Lumpur.

"We still see the environment pitted with risk, and accordingly see today's rebound in Asian units as purely an opportunity to cover for dollars with some cheap entry levels."

Concern about debt crises elsewhere have weakened a bullish trend in emerging Asian currencies, which was backed by the region's stronger fundamentals and inflation-fighting efforts.

Still, emerging Asian currencies are still attractive in the longer term, given problems of the two major developed markets, analysts said.

"If they keep having emergency euro zone meetings but with nothing out of it... Some market players may be buying CHF and JPY (against the euro and dollar) for risk aversion hedging and getting AXJs for upside," said Saktiandi Supaat, head of FX Research at Maybank in Singapore.

The positive outlook for Asian bonds and continuous inflows to the markets also brighten their long-term prospects, Year-to-date inflows into Emerging Market Bond Funds have topped $15 billion while outflows from Europe Bond Funds moved closer to the $17 billion mark, fund tracker EPFR Global showed.

Some dealers and analysts expect emerging Asian currencies to get a bigger boost if the US political leaders reach a debt deal, saying worries about an American default have been factored in by markets.

BAHT

The baht is expected to rise more, probably to May's high of 29.84 per dollar, as realisation slowly dawns on the catch-up play in Thailand.

Thai central bank is expected to take more steps to stem inflationary pressure, analysts said. Bank of Thailand was earlier spotted buying dollars to curb the baht's strength, but then it disappeared, dealers said.

DBS believes the baht is likely to strengthen against the Malaysian ringgit as the Thai central bank raises interest rates more while its Malaysian counterpart holds off on similar action.

"The THB has scope to appreciate against MYR when the BOT started to narrow its policy rate differential with its Malaysian counterpart," DBS said in a note.

The baht had been the worst performing emerging Asian currencies this year, amid domestic political uncertainty. After the July 3 Thai election raised hopes that political tensions would ease, the baht has strengthened. It now has risen 0.9 percent against the dollar this year, outpaced the Indian rupee

PHILIPPINE PESO

The Philippine peso appreciated past 42.88 per dollar, the 76.4 percent Fibonacci retracement level of the dollar/peso's rise between May and June.

A higher balance-of-payments surplus provided more support to the peso.

However, players were reluctant to buy the peso aggressively on persistent worries about debt problems in the euro zone and the US

"Everyone is keeping light positions ahead of EU meeting and US debate on July 21 and 22," said a European bank dealer in Manila.

But the dealer said the peso should rise more at the end of this week as concerns over fiscal problems in the developed markets have been priced in the market.

WON

The won rose slightly against the dollar as foreign investors kept buying South Korean bonds and on exporters' demand for settlements.

Earlier, Goldman Sachs revised up forecasts for the won, based on a brighter outlook for South Korea's balance-of-payments and the likelihood of rate rises because of strong inflation pressures.

Goldman said it sees dollar/won at 1,040 at three months (compared with 1,060 previously), 1,030 at six months (compared with 1,050) and at 1,010 in 12 months' time (rather than 1,040).

It said annual inflation is likely to be above 4 percent -- the target of the government and central bank -- if not countered by substantial appreciation of the won.

The South Korean currency is the best performing Asian currency with a 7.1 percent gain against the dollar this year as Seoul kept pledging to fight inflation.

RUPIAH

The rupiah steadied as bond inflows offset dollar demand from corporates and local banks.

Demand for Indonesian government bonds is seen strong as interest rates remain attractive.

Copyright Reuters, 2011