Won leads Asia FX gains, wary of Franco-German summit

SINGAPORE: The South Korean won rose on Tuesday as rebounding stock markets and expectations that China will allow the yuan to appreciate more rapidly enticed hedge funds and real money accounts back into emerging Asian currencies.

Many investors remained cautious, however, before a Franco-German summit later in the day on the euro zone debt crisis.

Some market watchers had earlier hoped for signs of progress on further measures to quell the debt crisis from the summit between French President Nicolas Sarkozy and German Chancellor Angela Merkel.

Traders were particularly focused on whether the leaders would discuss the issuance of joint eurobonds, but officials in Paris and Berlin have said that topic was not on the agenda for Tuesday's talks.

Emerging Asian currencies are expected to suffer again if the summit disappoints global markets, especially in light of evidence that the European economy is rapidly cooling, analysts and dealers said.

German economic growth nearly stalled in the second quarter from the first, data showed, pushing down the euro, equities and Asian units.

"Without any form of a fiscal union, it will be difficult for any stop-gap measures to be workable in the long term. The key here is even if there is a eurobond, questions will arise on how this bond is going to be priced, and whether the ECB is part of it as well," said Suresh Kumar Ramanathan, regional rates and foreign exchange strategist for CIMB Investment Bank in Kuala Lumpur, adding emerging Asian currencies were susceptible to further declines.

"It is still too early to suggest that the current rally in AXJ FX is sustainable. The key event risk is Jackson Hole on Aug 26th. If (Federeal Reserve Chairman) Bernanke suggests more QE3 is in store, it will be time to engage on long AXJ FX play. Until then, the current rally does not suggest that risk is on again."

Emerging Asian currencies have clawed back some ground after steep losses last week on worries about the slackening global economy and debt problems in the euro zone and the United States.

But the economic and fiscal strains in the developed markets are expected to keep putting pressure on emerging Asian currencies, given the region's heavy reliance on exports.

"After the downgrade, growth risks in Asia escalated along with downward revisions to US growth forecasts and warnings of another recession. The forthcoming policy shifts could weaken the conviction for currency strength in selective Asian economies," Bank of America Merrill Lynch said in a note, referring to S&P's US rating cut.

On the other hand, renewed expectations that China will allow faster gains for the yuan are lending some support to emerging Asian currencies, though some doubt Beijing is willing to allow a more rapid run-up in renminbi, especially in light of the cooling global economy.

The yuan hit a fresh record high on Tuesday as the central bank kept fixing its reference rate at new peaks, indicating Beijing may be engineering a "mini-revaluation" of the Chinese currency, traders said.

"The China play probably has legs for one to two more sessions but I think (US Vice President) Joe Biden will not be in a position to persuade China to do anything they do not think is appropriate at this time, so do leave take profit targets in the next one-two days since we've already seen a decent move from last week's levels," said Kenneth Kan, head of emerging markets forex trading at Credit Agricole Corporate and Investment Bank in Singapore.

Still, many analysts maintain their bullish views on emerging Asian currencies for the longer-term, citing stronger economic and fiscal fundamentals.

Even though Asian policymakers are seen as less aggressive in policy tightening now that growth is easing, the region's interest rates are still higher than developed countries.

Standard Chartered said it is re-entering real money portfolios with a bullish outlook for the regional units, a day after it advised Asian exporters to raise their currency hedging ratio.

"We think Asia ex-Japan (AXJ) currencies will be among the prime beneficiaries of the asset reallocation process as the region's much stronger economic, balance-of-payments and debt fundamentals increase its attractiveness to investors," StanChart said in a note, adding it was significantly long the won, the Indonesian rupiah and the Indian rupee.

WON

The won rose on hedge funds' demand and as foreign investors turned to net buyers of Seoul stocks after nine consecutive sessions of net selling. But the South Korean currency gave up some of its earlier gains as importers bought dollars for settlements and local interbank speculators added dollar positions. Some offshore players also sold the local currency.

Investors remained reluctant to buy the won when it strengthened past 1,070.0, analysts and dealers said.

"USD/KRW is not free from a big trend, so we'd better be careful in short plays in 1,060s," said Jeong My-young, a currency strategist at Samsung Futures in Seoul.

Foreign investors bought a net 661.1 billion Korean won ($612.6 million).

Dealers wondered if the won's supplies linked to the purchases would support the currency further as foreigners' recent massive stock sales have not dented it much.

PHILIPPINE PESO

The Philippine peso slightly rose but non-deliverable forward-fixing related dollar demand limited the currency's gains.

Investors were also wary of France-German summit later in the day.

"Risk sentiment is coming back but market will still remain cautious ahead of the Germany-France meeting later today," said a European bank dealer in Manila.

SINGAPORE DOLLAR

Real money accounts tried to lift the Singapore dollar past 1.2000 per US dollar, but the central bank was spotted defending that level, dealers said.

The city-state's currency turned weaker on the intervention and a weaker euro.

Last month when the Singapore dollar hit a record high of 1.1993 versus the greenback, Monetary Authority of Singapore was spotted defending the 1.2000 line, according to dealers.

The Singapore dollar has been best performing emerging Asian currency with a 6.5 percent gain against the US dollar so far this year as investors sought the local currency in safe haven trades.

Inflows to the city-state pushed swap off rates (SOR) into negative territory. But some of them such as one-month SOR and two-month SOR returned to positive territory.

Copyright Reuters, 2011