The Malaysian ringgit had the biggest gains among emerging Asian currencies on Tuesday as foreign investors bought the country's bonds, while the baht enjoyed fresh inflows as investors continued to take upbeat views of the region's long-term prospects.
The ringgit gained 0.3 percent against the dollar on demand for its short-term bonds. Last week, the Malaysian currency hit a five-month low on worries about its coming election.
Demand for regional assets helped some regional currencies recover from slides early Tuesday. The South Korean won and the Indonesian rupiah recouped losses, thanks to bond inflows. The Philippine peso edged lower with intervention spotted, but stock-linked inflows kept supporting it, dealers said.
"Investors are still looking for values in emerging Asia. The baht and the Philippine peso could be possible top picks in part on the back of selective portfolio inflows," said Saktiandi Supaat, head of FX research for Maybank in Singapore. However, Supaat said he remained cautious about the ringgit, citing the election that will be hotly contested.
Most emerging Asian currencies strengthened in late 2012, and investors largely had expected them to keep appreciating this year due to the region's stronger economic fundamentals and increased liquidity due to money printing by major central banks. But in January, many of the gains late last year were erased as investors saw these as overdone, and regional authorities warned against sharp rises in their currencies. "It would seem that the move higher in dollar/ex-Japan Asian currencies was due to positioning and for now at least the short squeeze has run its course," said Callum Henderson, global head of FX research with Standard Chartered Bank in Singapore.
Emerging Asian currencies should eventually strengthen again, but now are unlikely to change very much, Henderson added. On Tuesday, investors hesitated to add bullish bets on emerging Asian currencies amid concerns that a potential political shake-up could disrupt European efforts to resolve its debt crisis. Yields on Spain and Italy government bonds were higher.
Spain's opposition party called for Prime Minister Mariano Rajoy to resign, while Italy's former prime minister Silvio Berlusconi regained some popularity in opinion polls. "Political troubles in Italy and Spain are brewing. So many were looking to long dollar/Asia," said a senior Malaysian bank dealer in Kuala Lumpur. Standard Chartered's Henderson said he favoured selected regional units with better value rather than chasing them as a group.
"The focus is still very much on relative value within Asia ex-Japan rather than long or short the region against the dollar," he said. He recommended being overweight in the won and the Philippine peso and underweight in the Singapore dollar and rupiah. The ringgit started the day weaker but turned higher as inflows to Malaysia's short-term bonds caused investors to cut dollar-long positions.
But the Malaysian currency gave up some of the gains on worries about the euro zone and caution before the national election due by mid-year. The worries have been putting pressure on the ringgit. "I would buy dollar around 3.0800," said one Malaysian bank dealer, adding that he expected the ringgit to return to last week's low of 3.1140. That level was the ringgit's weakest since September 7.
The Taiwan dollar rose as exporters rushed to buy it for settlements before the Lunar New Year holiday. The island's exporters still have some time before the long holiday, but bought the Taiwan dollar when it was weaker than 29.500 to the greenback, noting recent volatility in global financial markets.
Taiwan's foreign exchange market will be closed all next week for the holidays. The central bank was spotted buying US dollars around 29.520-29.530, limiting the Taiwan dollar's upside, dealers said. Foreign financial institutions joined the central bank's buying, they added.
The baht gained on fund inflows, although investors stayed cautious over potential intervention by the central bank to cap the currency's strength. The Thai currency has been the second-best performing emerging Asian currency this year, after the rupee. "I stay bullish on the baht, given Thailand's current account surplus and low inflation," said a European bank dealer in Singapore, adding he expects the baht to head to 29.00 eventually.
The won eased as worries about the euro zone spurred dollar-short covering and on importers' dollar demand. The South Korean currency found some relief from bond inflows and exporters' demand for settlements before the Lunar New Year holidays this weekend. Bond market players saw a US fund, Chinese investors and some foreign insurers as main buyers of local bonds. That came after the country reported that January's foreign net outflows from domestic bonds and stocks were the largest in 13 months.
"Foreigners' recent bond demand indicated that they expect the won to appreciate eventually. The won's recent weakness after the authorities' warnings encouraged them to buy on dips," said a bond dealer at a Korean brokerage in Seoul. On Monday, bond inflows caused stop-loss dollar selling, helping the won enjoy its largest daily percentage gain since December 2011.
The rupiah slid on dollar demand from domestic importers, dealers said. But its indicative prices matched traded ones, indicating improved liquidity, dealers said. The rupiah's traded levels had been weaker than screen prices when the market was hurt by a dollar-shortage. The rupiah barely reacted to Tuesday data showing that Southeast Asia's largest economy grew 6.23 percent last year, slightly less than expected.
"The rupiah will stabilise despite importers' dollar demand. The growth is still higher, compared to other countries, and I saw some bond inflows," said a Jakarta-based dealer. The central bank is also expected to keep intervening to prevent further weakness in the rupiah, he added. Rupiah forwards advanced with one-month dollar/rupiah non-deliverable forwards down 0.4 percent to 9,660, limiting the spot's downside.
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