SINGAPORE: The Singapore dollar broke through a short-term support line on profit-taking by investment banks amid intervention caution and negative rates on Thursday while investors reduced exposure in emerging Asian currencies as stocks weakened, indicating weak sentiment on the regional units.
Emerging Asian currencies may see more corrections if US data later in the day raises a possibility of a double-dip recession in the world's top economy, analysts and dealers said.
"Markets are still dictated more by sentiment than fundamentals, which remains fragile, so (investors) still have to limit (emerging Asian currencies) positions," said Frances Cheung, a strategist at Credit Agricole CIB in Hong Kong.
The regional units, which have been boosted by stronger economic and fiscal fundamentals, lost some gains on persistent worries about a slackening global economy, given Asia's dependence on exports, and the euro zone's debt crisis.
Investors are keeping an eye on a slew of US economic indicators such as weekly jobless claims, existing home sales and business conditions in the Mid-Atlantic area.
With the concerns, some Asian policymakers are seen having started reconsidering their stances on inflation fighting.
Some speculate that Singapore's central bank, which has been spotted keeping the city-state currency weaker than 1.20 versus US dollar, will tweak its policy to slow the local unit's rapid rise.
The Singapore dollar has been the best performing Asian currency this year with a 6.2 percent rise against the greenback, as investors sought the AAA-rated country in safe haven trades on views that the Monetary Authority of Singapore (MAS) will allow currency appreciation to fight inflation.
But the recent corrections in emerging Asian currencies do not signal the end of a long-term bullish trend, analysts and dealers said.
"Global growth is likely to slow but we expect the EM-developed growth differential to widen due to current events. With the Fed on hold for as long as the eye can see, the CNY, TWD, and SGD should continue enjoying the ride," Barclays Capital said in a note.
SINGAPORE DOLLAR
The Singapore dollar briefly weakened past short-term support of 1.2090 per US dollar, the city-state currency's strongest point on August 11. Investment banks and US banks covered US dollar short positions.
That has caused short squeezes by onshore interbank speculators, dealers said.
The short-covering came as MAS has showed firm determination to defend 1.2000 level and as Singapore dollar forwards are negative.
Recently, swap offer rates (SOR) also went into negative territory.
"It's not very rewarding to keep long SGD (on MAS intervention and negative rates), so we are seeing people reduce SGD longs," said a dealer.
But some analysts still expect the Singapore currency to rise again.
"I guess today's moves possibly are just flushing out of some long SGD positions," said Wai Tuck Lee, Forecast's senior currency strategist, citing talk about possible MAS intervention as well as draining of market liquidity and negative interest rates.
Investors will buy the Singapore dollar on dips, especially around 1.2100 and 1.2150 levels, Lee added.
WON
The won fell 0.3 percent as offshore investors sold the South Korean currency amid weaker stocks.
Some dealers are wary of possible dollar-buying intervention by the country's foreign exchange authorities, especially when the won strengthened past 1,070 versus the greenback.
Some suspected the authorities of buying dollars on Tuesday when the local currency strengthened to as firm as 1,067.8.
But many players wondered why the authorities tried to keep it weaker than 1,070 as the country is fighting inflation.
A currency analyst said: "They may want to have more FX reserves, just in case of a crisis (if they intervened). The reserves may have decreased, partially due to their dollar-selling intervention."
The won has a resistance at 1,066.9, the 61.8 percent retracement of its depreciation earlier this month. The currency tried to break it three times, but ended session softer than that level.
Copyright Reuters, 2011
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