Most emerging Asian currencies rose on Friday and were set to post gains for the week as investors' appetite for riskier assets continued to slowly recover after last week's Brexit shock. Hope of more stimulus from the Bank of England and other major central banks also supported sentiment. China's yuan bucked the regional firming trend, however, and remained within sight of its 5-1/2-year low set at the start of the week. Reuters on Thursday reported that the central bank is willing tolerate a 4.5 percent drop in the yuan for 2016.
The Malaysian ringgit hit a one-week peak on bond inflows, leading its Asia peers on Friday, though it later pared gains as exports in May unexpectedly fell. South Korea's won was on the course to enjoy the largest weekly gains in nearly five years, as data showing a record trade surplus in June helped it return to levels before the Brexit vote late last week.
"How emerging Asian currencies responded suggested that the Brexit fear appears to be a localised European event for now," said Christopher Wong, a senior FX strategist for Maybank in Singapore. "But I try not to over-read those price actions as a new trend as EU contagion risks and uncertainty over the UK's future remain. So, the second half could see a heightened level of uncertainty and volatility."
With Brexit clouding the global outlook, expectations grew for more monetary easing by major central banks, supporting global equities including Asian stocks. Bank of England Governor Mark Carney said on Thursday the central bank would probably need to pump more stimulus into Britain's economy over the summer after Britain's vote to leave the European Union last week.
Asian central banks are also likely to cut interest rates further to cushion their economies from potential Brexit fallout. On Thursday, Taiwan's central bank trimmed borrowing costs for the fourth consecutive meeting, and some economists believe its peers in China and Japan may be ready to pull the trigger as early as this month. Prospects of easing may not hurt global appetite for yields in Asia much as regional interest rates are still higher than developed markets and further rate cuts could help capital gains for bondholders.
But many analysts warned of possible corrections in emerging Asian currencies as regional economies struggle. China's factories stalled in June on weak exports and job cuts, an official survey showed on Friday, indicating sustained pressure. Any sustained forex appreciation in Asia "will bring forward interest rate cuts from central banks in Asia to weaken currencies and support growth," said Sean Yokota, head of Asia strategy at Scandinavian bank SEB in Singapore.
The won led weekly gains among emerging Asian currencies with a 3.0 percent appreciation against the dollar. If maintained, that would be the largest weekly advance since October 2011, according to Thomson Reuters data. Offshore funds scrambled for the South Korean currency to unwind bearish bets, tracking foreign demand in Seoul shares. Exporters also chased it for settlements.
The ringgit has risen 2.3 percent so far this week on expectations that Malaysia's central bank may cut interest rates. The gain would be the biggest weekly gain since the week ended April 1, Thomson Reuters data showed. Some currency traders, however, booked profits on the disappointing trade data. "I think we are too late to the party," said a senior Malaysian bank trader in Kuala Lumpur, when asked if he would buy the ringgit further given bond inflows.
Indonesia's rupiah has risen 1.8 percent throughout this week as the government is launching a tax amnesty programme, which is expected to slash its fiscal deficit. The Taiwan dollar has gained 1.0 percent for the week as foreign investors were net buyers in the local stock market in the previous three consecutive sessions. The Indian rupee have risen 0.8 percent, while the Singapore dollar has risen 0.6 percent. The yuan, however, was on the course for a fourth straight week of depreciation with a 0.4 percent slide.
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