Local currency selloff slows, liquidation fears remain

SINGAPORE: Institutional investors sold emerging Asian currencies on Wednesday, putting pressure on the Singapore dollar and the South Korean won, though short-term speculators bought some of the regional units such as the Malaysian ringgit on dips.

Traders say so-called offshore real money funds have been sharply reducing their direct exposure to Asian currencies for the past week, with the volatility in the foreign exchange market causing fund managers to hedge by buying dollars.

Some funds also built up dollar-long positions against emerging Asian currencies, such as the Singapore dollar, the Indonesian rupiah and the won.

Emerging Asian currencies have been pressured by dollar-demand in non-deliverable forwards from hedge funds and as some investors used forwards to hedge against further falls in the regional currencies.

After heavy selling over the past week, most of the regional units started the day slightly firmer amid caution over possible dollar-selling intervention by the foreign exchange authorities.

South Korean authorities were spotted buying the won to prevent it from weakening past 1,150 per dollar during the local trade, dealers said. Traders have estimated that from last week through this Tuesday, Seoul spent as much as $8 billion to limit the won's slide.

Investors have remained cool to emerging Asian currencies n persistent worries about slackening global growth and the euro zone's sovereign debt crisis, which pushed down other emerging currencies such as the Brazil's real and Mexican peso.

However, that does not mean that investors are pulling out completely from Asia, some analysts said.

"We don't think that is related to outright redemption or liquidations. It seems to be hedging of existing positions," Mohammed Apabhai, head of Asia Pacific trading strategies at Citi, told Reuters Insider TV in Hong Kong.

"What people are doing is taking some of the risk off the table by neutralizing some of their FX exposures... But it isn't a significant cause for panic or alarm at this moment."

Emerging Asian currencies, which outperformed in August, were hit by position cuts which snowballed into liquidation fears.

Despite some demand on dips, regional currencies are expected to stay bearish in the short term.

Adding to fears over the health of the global economy, Japan's exports in the year to August rose at less than half the pace expected, while South Korean exports in the first three weeks of September fell about 10 percent from a year earlier.

The concerns kept investors from adding exposure to emerging Asian currencies despite anticipation of new steps by the US Federal Reserve to boost the world's top economy.

Investors are keeping an eye on results of the Fed's meeting later Wednesday. Analysts expect the US central bank to announce plans to rebalance its portfolio to push down long-term interest rates.

"I will wait until FOMC tonight to see if I should short USD/Asia," said a Kuala Lumpur-based dealer.

The dealer sees emerging Asian currencies weakening again if the Fed does not take bolder steps.

SINGAPORE DOLLAR

The Singapore dollar fell as leveraged accounts and interbank speculators joined selling by real money funds.

"Real money names appear to keep unwinding short USD/SGD positions. The pair is seen having room to rise more, probably to 1.28 and 1.30, technically," said a senior European bank dealer in Singapore.

The city-state's currency has the 61.8 percent Fibonacci retracement of its appreciation between Nov last year and July at 1.2775 per US dollar and the 76.4 percent retracement at 1.2960, respectively.

WON

The won turned weaker on real money names' selling, although it closed in domestic trade stronger than 1,150 per dollar because of intervention.

But the South Korean currency weakened past that level after the domestic market closed.

Dealers said the amount of dollar sales by the foreign exchange authorities was relatively small without providing specific figures.

Real money accounts sold the won from the 1,145 level, dealers said.

"The 1,145 support (for dollar/won) is so strong and I gave up bets on further falls," said a foreign bank dealer in Seoul.

RUPIAH

The rupiah opened at 8,880 per dollar with offers only, no bid.

Markets remained extremely nervous with the gap between bids and offers likely to remain wide, like on Tuesday. Brokers were quoting 100 rupiah wide of 8,900-9,000 again.

Continued selling of rupiah bonds by offshore banks further weighed on the Indonesian currency.

The central bank reportedly sold some $500 million to limit the rupiah's falls on Tuesday.

RINGGIT

The ringgit turned slightly lower, tracking overall weakness in its Asian peers.

Earlier, it rose on fixing-related demand and as interbank speculators reduced dollar-long positions, with the unit seen as technically oversold, dealers said.

The 14-day dollar/ringgit relative strength index (RSI) rose to 81.775, the highest since early Sept 2008, above the threshold 70, indicating the pair is in overbought territory.

Copyright Reuters, 2011