Emerging Asian currencies are expected to fall further over the coming year as a regional economic slowdown, led by China, and prospects of higher interest rates in the US propel the dollar higher, a Reuters poll showed. Asian currencies have weathered the recent turmoil in financial markets and the relentless dollar rally over the past year relatively better than other emerging market assets.
-- Indonesian rupiah to lead losses
-- Chinese yuan to depreciate 4 percent
While they are expected to weaken some more, the falls are projected to be, on average, less than major currencies in Latin America and Africa. The poll of foreign exchange strategists showed the Indonesian rupiah will lead losses in Asia and weaken over 6 percent in twelve months, followed by a fall of over 5 percent in the South Korean won and a 4 percent slide in the Chinese yuan.
Those losses, while much less than the 8 percent slide projected for the Brazilian real, add to sharp falls in major Asian currencies so far this year. The rupiah is down 12 percent since January, while the won is weak by over 5 percent. Expectations the Federal Reserve will soon hike rates in the world's largest economy, after it passed the chance to do so in September, has given fresh impetus to the dollar rally, although the timing of that first increase since 2006 is still unclear.
Minutes of the Fed's last meeting showed policymakers remained cautious and wanted more evidence that the economy would stay on track. Financial markets are currently pricing in a move in March next year, while a majority of economists still predict it will be this December. "Despite this delay, we expect the dollar to outperform all major currencies, as the global slowdown and opaque foreign exchange policy in China will continue to weigh on emerging markets," economists at Barclays wrote in a note.
China unexpectedly devalued the yuan in August, a move its government said was required to make the currency more market-oriented but an action that investors viewed as an official acknowledgement of slower growth. The summer rout in Chinese stocks, and the surprise devaluation, jolted global financial markets and forced policymakers around the world, most notably in Britain, the euro zone and the United States, to signal a continuation of easy monetary policies to contain the damage to markets.
While Beijing has ruled out further deliberate devaluations, analysts predict the yuan will trade around 6.62 to a dollar in a year's time from 6.35 on Friday. "Chinese authorities' incessant and deliberate intervention in recent days to strengthen the renminbi appears to be aimed at inflicting pain upon renminbi shorts, and changing market expectations of continued depreciation," BNP Paribas FX strategists wrote.
A Reuters poll last week showed short positions in the Chinese yuan have fallen to its smallest since early August. But persistent worries of a slowdown in China, which posted 7 percent growth in the second quarter, has dampened the mood and sent bearish bets on the Malaysian ringgit and rupiah to the largest in a month.
The ringgit is the worst performing Asian currency this year, having fallen over 21 percent, although with a 2.8 percent further drop, it is seen losing less compared to others over the forecast period. The Indian rupee, one the least affected Asian currencies, is seen weakening in a year to 66.70 from around 64.8 on Friday, as further easing from the Reserve Bank of India, which cut rates by a more-than-expected 50 basis points last week, is likely to pressure the currency.