Asian currencies will rally modestly against the US dollar over the coming months, helped by superior economic growth, trade surpluses and resulting capital inflows, a Reuters poll showed. Still, concerns of a policy reversal by the Federal Reserve and excessive weakness in the Japanese yen could undermine the more export-reliant Asian economies and take the sheen off some currencies in the region.
---- Won, Philippine peso to outperform
The poll of 70 currency strategists and economists conducted over the past week showed all nine emerging Asian currencies were expected to appreciate in the next year, with the South Korean won expected to lead the pack with a 5 percent gain. The Philippine peso which recently got a boost after the country was upgraded to an investment-grade credit rating for the first time, is expected to gain around 4 percent, while the Indonesian rupiah, Chinese yuan and Thai baht are expected to rise around 1 percent.
The Thai baht has outperformed its peers in the first quarter of this year due to strong capital inflows into Thai equities, bonds and infrastructure projects. The won, on the other hand, has weakened over 4 percent in the same period as the South Korean economy sputters. "What Asia has to contend with this year is the potential that the US dollar may gain traction across the board," said Emmanuel Ng, currency strategist at OCBC in Singapore.
"That is what we have seen in the first quarter. It's going to be an interesting year because we have competing themes. Is it going to be a year of broad dollar strength or will factors like strong inflows and better growth drive these currencies?" Although most Asian economies are expected to easily outperform their rich world peers this year, growth rates are far below levels seen before the global financial crisis. China and India are expected to grow 8.1 percent and 5.5 percent respectively this year, much lower than the close to double-digit growth rates seen in the past.
Yet, relatively higher growth and yields compared to developed economies have drawn global investors to the region, and analysts say that barring a major reversal in monetary policy in the developed world that trend will likely continue. Among the key concerns is when the US Federal Reserve will begin to signal an exit from its super-loose, money printing routine.
The Fed has pumped trillions of dollars into its economy to aid job creation and spur growth. With the unemployment rate dropping to 7.7 percent in February, the din among investors trying to time the Fed's policy shift is growing louder. When that happens, analysts say Asian currencies could depreciate across the board if exports from the region do not pick up significantly.
"The Fed's exit strategy is something the markets are trying to sell to themselves. This year is probably the year when such talk is going to heighten," said Emmanuel Ng. "Unless there is a very strong conviction that China will bounce back and the export cycle will be very strong, it's hard to say Asian currencies will detach and not be affected by the Fed's exit from quantitative easing."
The yen's weakness, if it lasts, is another cause of concern among policymakers and investors in the region, particularly for South Korea, as it makes their exports less competitive. The excessive yen weakness coupled with sharp appreciation in many export-oriented Asian currencies had given rise to fears of currency wars and competitive devaluations.
But with most currencies underperforming in the first few months of this year, analysts say those risks have taken a back seat for now. Expectations of a Chinese economic recovery are expected to push the yuan 1.3 percent higher versus the dollar in a year's time, trading at around 6.12 compared with Wednesday's rate of 6.20. The currency hit a record high of 6.1986 per dollar for the second straight day on Tuesday as the central bank set an unexpectedly strong midpoint in a move traders said indicated the government's tolerance of measured yuan appreciation.
"I think the yuan will keep its bullish trend thanks to the recent mild recovery of China's economy. But the dollar strength in the coming year may ease upward trend on the yuan," said Nie Wen, economist at Hwabao Trust in Shanghai. Analysts also forecast the Indian rupee to gain around 4 percent in twelve month's time, although it will likely trade around current levels over this quarter.
The currency, battered by slowing economic growth and a yawning current account deficit, has depreciated over 9 percent during the last year. But analysts said the government's resolve to push for economic reforms like fuel price deregulation and implementing favourable conditions for foreign investment will narrow the deficit and help the currency.
"The rationale behind longer-term rupee appreciation is admittedly a tough call but we think the ruling coalition, even as they head into elections next year, will continue to push through economic reforms," said Vishnu Varathan, economist at Mizuho Corporate Bank. "The current account position will show some signs of improvement due to fuel price deregulation and global oil prices remaining fairly subdued.
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