SINGAPORE: The South Korean won hit a nine-month low on Tuesday as real money funds continued to reduce positions in emerging Asian currencies and forced the regional units to breach technical support lines, indicating there could be further falls.
Foreign exchange authorities in Korea, Indonesia and the Philippines kept buying their currencies to limit their falls. But investors took the interventions as chances to sell them on rallies amid heightened worries about the euro zone's debt crisis after Standard and Poor's cut its debt rating on Italy.
"In a one-month horizon, I would avoid Asian FX as there is still lots of uncertainty. There are even outflows from some bond markets, highlighting Asian assets are to suffer in a risk off environment," said Frances Cheung, senior strategist for Credit Agricole CIB in Hong Kong.
Cheung expects the won and the Indian rupee to suffer more than their Asian peers, given the won's high volatility and India's current account deficits.
S&P cut its unsolicited ratings on Italy by one notch, warning of a deteriorating growth outlook and damaging political uncertainty, in a move that took markets by surprise and added to pressure on the debt-stressed euro zone.
The move came amid growing concerns over whether Greece can borrow desperately needed cash from international lenders to prevent a default on its sovereign debt.
Bank of China , a big market-maker in China's onshore foreign exchange market, has stopped foreign exchange forwards and swaps trading with several European banks due to the unfolding debt crisis in Europe, three sources with direct knowledge of the matter told Reuters.
The persistent worries about European debt and a global economic slowdown crisis forced emerging Asian currencies to give up their gains in 2011, with some of them turning red.
The regional units are not the only victims. Growth-linked Australian dollar hit six-week low and Latin American currencies also suffered with Brazil's real plunging to a 14-month low.
James Cielinski, head of fixed income for Threadneedle Asset Management, said a slowdown in Asian economies and growing market speculation about the potential for eventual monetary easing in emerging Asia is negative for Asian currencies.
"With the slowdown, we said there's even more of a reason to be long the bonds but less of a reason to be long the currencies... Because we kind of go from tightening to easing getting priced in, that's not the best environment for currencies," Cielinski said at a media briefing in Singapore.
"We did change our strategy recently," he said. "Starting to hedge the currency was a change we made... about a month ago."
Threadneedle had previously been long both Asian bonds and currencies, but decided to start hedging its foreign exchange exposure to emerging Asian currencies, Cielinski said.
He said Threadneedle was likely to keep its currency hedges on emerging Asian currencies in place in the near term, although it has started to take some hedges off in select cases such as the won.
Cielinski added that the recent drop in Asian currencies is likely due to investors exiting from crowded positions, but added that he did not think the weakness in Asian currencies was the start of a long-term trend.
Threadneedle, which has assets under management of $110.4 billion, holds roughly $10 billion in Asian equities outside Japan, and about $300 million in Asian bonds outside Japan, mostly government debt.
An Asian fixed-income fund manager at a US fund house in Hong Kong said local currency bonds may suffer more on the weakness in the regional units, although he has not seen any outflows in the house's local currency products yet.
"This move is purely driven by FX. The drop in FX and the widening between offshore and onshore FX points has meant that holding local bonds is a losing proposition. Fundamentally, nothing has changed but these are not fundamentally sound market conditions," the fund manager said.
"We are cutting duration in some of these markets like Indonesia and Korea and we are watching markets like Thailand and Malaysia which have been somewhat more resilient than the others for attractive entry points."
WON
The won weakened past a 200-week moving average of 1,155.4 per dollar briefly to hit a nine-month low of 1,156.50 as South Korean importers and investment trust firms joined real money funds selling the currency.
Seoul's foreign exchange authorities bought the local unit steadily. They managed it to finish in domestic trade at stronger than 1,150, but after the close the currency weakened past that level, dealers said.
Earlier, the country's top foreign exchange official warned its recent decline was excessive.
"I think the won has been reacting too excessively (to the global instability) and would eventually face a correction," Deputy Finance Minister Choi Jong-ku told reporters.
PHILIPPINE PESO
Real money funds and interbank speculators pushed down the Philippine peso to a six-month low, although the central bank was spotted buying it to prevent it to weaken past 43.700 per dollar, dealers said.
But the peso may weaken more, probably to 44.030, the 76.4 percent Fibonacci retracement of its strengthening trend between Jan and Aug, if it ends the day weaker than 43.623, the 61.8 percent retracement line, dealers said, citing a global risk aversion.
SINGAPORE DOLLAR
The Singapore dollar also hit a six-month low against the US dollar as real money accounts and macro funds sold it.
The city-state currency is seen having a room to weaken more, probably to 1.2775 versus the greenback, the 61.8 percent Fibonacci retracement of its appreciation from November last year to July.
RUPIAH
The rupiah lost more than 2 percent in thin trading although the Indonesian central bank was spotted selling dollars.
If the Indonesian currency stays weaker than the 61.8 percent retracement level of its appreciation between May last year and Aug this year, which is located around 9,030 per dollar, it may test 9,170, the 76.4 percent retracement.
Copyright Reuters, 2011
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