Markets

Asian FX rebounds on Fed, stocks; N. Korea briefly rattles won

SINGAPORE : The South Korean won and the Malaysian ringgit rebounded on Wednesday after the Federal Reserve pledged to k
Published August 10, 2011

 SINGAPORE: The South Korean won and the Malaysian ringgit rebounded on Wednesday after the Federal Reserve pledged to keep interest rates near zero until 2013, prompting investors to cautiously return to riskier assets after heavy selling in recent sessions.

The won ended up 0.8 percent against the dollar, after briefly weakening on reports that North Korea had fired artillery into disputed waters neara South Korean island. It recouped those losses after another report that the incident appeared to be a training exercise.

A rebound in battered Asian stock markets also lent support to regional currencies, though analysts were not sure how long the equity bounce would last amid festering debt problems in the United States and Europe and fears that the US economy could tip back into recession.

Still, the Fed's vow to keep rates at super-low levels for a prolonged period was seen as supportive for emerging market currencies, confirming the dollar's status as the funding currency of choice for carry trades into higher yielding assets, analysts and dealers said.

"What does keeping USD rates low for two more years mean for Asia? I think after this whole risk adjustment exercise is over, investors will borrow USD and buy Asian fixed income to earn the 'no brainer' carry," said Kenneth Kan, head of emerging markets forex trading at Credit Agricole Corporate and Investment Bank in Singapore.

Reflecting such expectations for regional currencies, spreads between one-month and one-year Asian non-deliverable forwards (NDFs) rates widened.

Goldman Sachs is seeing a greater-then-even chance that the Fed will resume quantitative easing later this year or in early 2012.

Another round of easing by the Fed would give a further boost to emerging Asian currencies eventually, but that may be counterbalanced to some extent by a pause in regional rate tightening as policymakers shift their focus from inflation to the slowing global economy.

"If QE3 happens, Asian currencies may benefit subject to sovereign credit differentiation. However, given central banks in the region are now at the end of their normalisation cycles with interest rate hikes, we need to monitor how receptive they are to capital inflows going forward," said Saktiandi Supaat, head of FX Research at Maybank in Singapore.

Still, with US stock futures once again pointing lower on Wednesday, dealers said the rebound in riskier assets could be short-lived.

A Kuala Lumpur-based dealer said: "skeptics will be selling riskier currencies as they think it's too early to call a turn."

WON

The won rose but ended off the day's highs as foreign investors kept selling Seoul shares and on importers' dollar demand.

Players are likely to keep an eye on foreign investors' stock flows rather than the geopolitical tensions on the Korean peninsula, analysts and dealers said.

"When the two Korea exchanged fires last year, the impact didn't last long," said Jeong My-young, a currency strategist of Samsung Futures in Seoul.

"What is more important is how bearish foreign investors are getting on stocks here. If they keep selling stocks that will stem the won's appreciation."

Despite a firmer tone in Asian stock markets on Wednesday, foreign investors dumped a net 1.28 trillion Korean won ($1.18 billion) in Seoul shares, their second-largest daily sale in history.

They have unloaded a combined net 4.53 trillion won in Seoul shares in the last seven consecutive sessions.

RINGGIT

The ringgit rose after managing to hold above its 200-day moving average on Tuesday and after data showed Malaysian industrial production rose marginally in June from a year earlier, better than expectations of a contraction.

The Malaysian currency found strong support at the 200-day moving average of 3.0443.

BAHT

Standard Chartered said it buys the baht against the dollar and the euro , saying the Thai currency has not been bought as heavily by investors as other Asian currencies.

Thailand's domestic fundamentals remain strong with the central bank seen continuing to raise rates and the current account balance seen staying in surplus, StanChart said.

"We expect USD/THB to retest the 29.46 low from 9 November 2010. To mitigate the volatility of the trade, we buy the THB versus 2/3 USD and 1/3 EUR," it said in a note.

StanChart sees the baht appreciating to 29.00 per dollar by the end of this year.

The baht has been strengthening versus the dollar and the euro since late June and early July, respectively, on hopes that the July 3 general election would ease Thailand's political uncertainty.

 

Copyright Reuters, 2011

 

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