SINGAPORE: Emerging Asian currencies fell on Thursday as investors dumped riskier assets after surging Italian borrowing costs boosted fears of a euro zone break-up, while the Indonesian rupiah slid to its lowest in more than six weeks after a larger-than-expected interest rate cut.
Slowing global demand also weighed on regional currencies, as China reported slower export growth and Philippine exports plunged.
On Wednesday, Italian 10-year bond yields jumped above 7 percent, a level most analysts see as unsustainable for financial debt of more than 2 trillion euros, dampening demand for riskier assets including emerging currencies such as the Brazil's real. Asian credit spreads blew out.
Portugal and Ireland were forced to seek bailouts not long after their sovereign debt surpassed 7 percent.
"It is likely that we see more downside for AXJ FX. The current state of play is a breakup of the European Union is certain, the next is which nations are in and those that are out," said Suresh Kumar Ramanathan, regional rates and foreign exchange strategist for CIMB Investment Bank in Kuala Lumpur.
"For those that are out, the question is would they get back to their national currencies and would their national central banks be given the mandate to decide on interest rate policy. There are so many known unknowns and unknown unknowns. Asia will continue to price in this risk and we don't see this crisis over anytime soon."
Most emerging Asian currencies have retreated this month as Europe's debt crisis worsened.
Two major clearing houses raised the level of collateral needed for those holding Italian government debt. That makes it more expensive for holders of the country's debt to borrow against it and looks set to trigger a cycle in which rising yields fuel more fear and more selling.
The move came as a pledge by Italian Prime Minister Silvio Berlusconi to quit failed to reassure bond markets that Rome has the will to bring its debts under control.
With worries about Europe persisting, some emerging Asian currencies such as the South Korean won, the Malaysian ringgit and the Indian rupee may suffer from unwinding of long portfolio positions, Sacha Tihanyi, senior currency strategist for Scotia Capital in Hong Kong.
The rupee may retest a record low of 52.20 per dollar on a widening trade deficit, falling car sales and a Moody's outlook downgrade of the country's banking sector.
Indian financial markets were closed on THursday, but offshore dollar/rupee non-deliverable forwards (NDFs) painted a bleak picture with one-month dollar/rupee NDFs at 50.50 per dollar, weaker than Wednesday's onshore closing rate of around 50.18.
RUPIAH
Spot dollar/rupiah and one-month NDF extended early gains after the central bank slashed interest rates by 50 basis points (bps), twice as much as most economists had expected.
Spot rose 1.5 percent to 9,030, the highest since Sept 27. Some dealers and analysts reported the central bank was intervening to sell dollars around the level.
Before the rate decision, it was at 8,985.
The one-month dollar/rupiah NDF rose 0.8 percent to 9,100, the highest since October 6.
SINGAPORE DOLLAR
US dollar/Singapore dollar rose above the 61.8 percent Fibonacci retracement at 1.2888 of its October slide on demand from interbank speculators and leveraged funds.
The pair cut some gains on profit taking, but it may head to 1.3000-1.3010, a cluster of previous highs and the 76.4 percent retracement.
Meanwhile, Standard Chartered advised buying the Singapore dollar against North Asian currencies such as the Chinese yuan and the South Korean won, saying the city-state's currency is likely to outperform North Asian peers.
"We recommend buying the Singapore dollar (SGD) 3M forward outright versus a SGD North East Asian (NEA) basket consisting of the Chinese yuan (CNY), Hong Kong dollar (HKD), Taiwan dollar (TWD) and Korean won (KRW). The weights should be in accordance with the weights in our SGD nominal effective exchange rate (NEER) basket: CNY 42.8 percent, HKD 26.1 percent, TWD 17.9 percent and KRW 13.2 percent," StanChart said in a note.
It estimates that the Singapore dollar nominal effective exchange rate (NEER) was currently trading around 1.50 percent away from the weak end of the policy band and 4.50 percent away from the strong end.
It expects the NEER to trade back towards the centre of the policy band over the coming months.
RINGGIT
Dollar/ringgit gained, breaking through the 61.8 percent retracement at 3.1473 of its October rises as interbank speculators chased it.
The pair is seen rising to 3.1570-3.1600, previous highs, and the 76.4 percent retracement at 3.1724.
But it cut some of rises in the afternoon on oil companies' sales.
WON
Dollar/won hit 1,137.5, a near three-week high as foreign investors posted their largest daily stick sales in seven weeks.
Foreign investors dumped a net 504.9 billion Korean won ($451.9 million) in Seoul stocks, the largest daily sales since September 14.
The pair cut some of the rises as exporters including shipbuilders sold it for settlements and a source said Michelin's sales of a South Korean tyre maker stake would not dollar demand.
The source told Reuters that the sale may create some 350 billion won of dollar/won offers as foreign investors bought about two-third of the stake.
Michelin has already completed a currency hedge for the deal through NDFs, so there would be no dollar demand linked to the sale, the source added.
But dealers have not seen dollar/won offers linked to the deal yet.
On Wednesday, Michelin said it sold all of its 9.98 percent stake in the South Korean tyre maker for 623 billion won.
PHILIPPINE PESO
Dollar/peso rose above a 200-day moving average of 43.235 on short covering.
Earlier, it rose to as high as 43.375 after data showed Philippine exports in September fell 27.4 percent from a year earlier, biggest slide in two and a half years.
But some dealers are looking to sell the pair on rallies, regarding the pair's gains as excessive.
"I prefer to sell on rallies and stop at the break of 43.40. The upside might be capped at the level for now as the OFW (overseas Filipino workers) remittance season is starting to peak," said a European bank dealer in Manila.
Resistance for the pair, at the 50 percent retracement of its October slides, is seen at 43.365.
Copyright Reuters, 2011
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