SINGAPORE: Emerging Asian currencies bounced on Tuesday, led by the South Korean won and Indonesian rupiah on buying by US investment banks and offshore funds, though the rebound was fragile, with the rising trend in the US dollar still evident.
Risk assets including Asian stocks and Latin American currencies overnight rose on a burst of optimism about the euro zone following a media report that Europe is considering beefing up its bailout fund.
Still, some foreign institutional investors and interbank speculators took Tuesday's rebound in emerging Asian currencies as an opportunity to sell the units on rallies, suggesting that the optimism can quickly end amid persistent doubts about whether the euro zone can fully tackle its debt crisis.
"Risk is recovering, but I'm reluctant to short dollar/Asia here. I will sell on rallies," said a senior dealer at an Asian bank in Kuala Lumpur.
"If the euro does not go above 1.36, I'm not convinced yet," said the dealer.
On Tuesday, the single currency rose to above 1.35, helping emerging Asian currencies rebound, as investors covered short-positions after CNBC reported that European officials are mulling setting up a special purpose vehicle to buy distressed debt from banks.
Emerging Asian currencies have stayed under heavy pressure from dollar-demand in non-deliverable forwards (NDFs) from offshore institutional investors such as leveraged funds, which in the past few weeks have rushed to hedge against further weakness in the units.
Some funds were entering fresh long positions against emerging Asian currencies.
Worries about liquidations in Asia eased, but investors stayed concerned over possible further redemption, which would put more pressure on emerging Asian currencies.
"Investors got out of their Asia (ex-Japan) positions last week. Foreign investors sent money back to the UK, US and Eurozone in good amounts, and we believe there is more real money selling to expect," UBS said in a note.
Among 10 emerging currencies in the world, the Singapore dollar last week had the second highest weekly outflows, following the Mexico's peso, according to UBS.
WON
US investment banks bought the won and South Korean exporters joined the bids, causing interbank speculators to clear dollar-long positions to stop losses.
Earlier, rises in the won were limited by importers' dollar demand for settlements and stock outflows, but the local currency found further support from exporters and from a 5 percent jump in Korea's benchmark stock index on Tuesday.
The South Korean currency, which is still seen as oversold, may enjoy a further rebound on a recovery in risk sentiment.
The 14-day dollar/won relative strength index (RSI) fell to 69.1, around the 70 threshold, indicating the pair is still near overbought territory.
"I added short dollar/won positions. It may rise again on the euro zone's problems. But if the 1,200 level becomes a strong resistance, my trading should be OK," said a senior foreign bank dealer in Seoul, adding he expects the won to move between 1,140 and 1,200 per dollar.
Last Friday, Seoul's foreign exchange authorities were spotted selling dollars to prevent the won from weakening past 1,200, according to dealers.
SINGAPORE DOLLAR
US investment banks, macro funds, leveraged names and interbank speculators bought the Singapore dollar.
At one point on Tuesday, the city-state's currency was expected to strengthen to around 1.2700 per US dollar where the 38.2 percent Fibonacci retracement level of its weakness since July stands.
The currency did appreciate, but only to 1.2868 to the greenback.
The 14-day US dollar/Singapore dollar RSI was at 71.0, indicating the pair remains overbought.
However, investors were reluctant to buy it further with some interbank speculators and leveraged names seen taking profits from its rebound.
The overall recovery in risk-assets "is just a temporary one-day thing. We still need more convincing developments," said a dealer, adding he wants to add long dollar/Asian currencies positions including dollar/Singapore dollar at 1.2810.
BAHT
The baht strengthened past a resistance of 31.00 per dollar on foreign banks' demand.
But dealers were reluctant to chase the Thai currency further around 30.90 level.
"We don't know what's going next in equities or any rebalancing again in the last quarter of this year. So, we'd better keep our money in the pocket," said a Bangkok-based dealer.
RINGGIT
Interbank speculators bought the ringgit on a rebound in the Singapore dollar.
Demand intensified after the Malaysian currency strengthened past 3.1650.
Copyright Reuters, 2011
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