Most emerging Asian currencies turned weaker on Wednesday with China's yuan near a five-year low as soft factory activity in the world's second-largest economy reinforced a bleak regional economic outlook. Asian currencies started the day firmer as the dollar retreated from a two-month peak on weak US economic data. They had briefly found further support from a jump in the Australian dollar after data showed the country's economy grew faster than expected in the first quarter.
The positive impact did not last long as the yuan approached its weakest reading since early 2011 with China's central bank setting its daily guidance rate at a five-year low for a third straight session. China's official Purchasing Managers' Index shows factory activity unexpectedly expanded last month but at a tepid pace. Meanwhile, a private sector survey showed Chinese factory activity shrank for a 15th straight month in May.
The South Korean won turned weaker to hit a near three-month low as disappointing local economic data bolstered expectations of an imminent central bank rate cut. "A strong Australian dollar on healthy data could support Asian currencies for the short term," said Jeong My-young, Samsung Futures research head in Seoul. "But that is only a near-term booster as a US rate policy path and a China's economic recovery are driving a long-term direction in Asian currencies."
US consumer spending recorded its largest gain in more than six years, suggesting solid economic growth could persuade the Federal Reserve to raise interest rates soon. The greenback, however, stepped back against a basket of six major currencies on weak consumer confidence and soft business activity in the US Midwest. The won fell as much as 0.3 percent to 1,195.6 per dollar, its weakest since March 11.
The South Korean currency started the local session slightly firmer and extended gains after Australia's growth data. But the unit reversed direction as custodian banks dumped it in the early afternoon, which some traders suspected was linked to preparation for a potential inclusion of China's stocks in benchmark provider MSCI's emerging market index. The MSCI will decide in mid-June whether to add Chinese shares to its emerging market benchmark, a move that could direct a large amount of capital into China's stock markets. Traders and analysts in Seoul's equity and currency markets said some foreign investors could move funds to the mainland from South Korea.
Currency traders already sold the won on its earlier rallies as disappointing economic data added to expectations that the central bank may cut interest rates to support Asia's fourth-largest economy. South Korea's exports in May unexpectedly fell while inflation cooled to a four-month low, government data showed. Manufacturing activity and new export orders improved last month, but only slightly, according to a private survey. One member from the Bank of Korea's monetary policy board said interest rates should be lowered soon, minutes from the central bank's May 13 meeting showed on Tuesday.
The Singapore dollar eased 0.2 percent to 1.3799 per the US dollar on the yuan's weakness. The city-state's unit closely tracks the renminbi as traders and analysts believe the Chinese unit to be a part of the undisclosed currency basket used by the Monetary Authority of Singapore to manage its monetary policy. Still, the Singapore dollar is seen having a solid chart support at 1.3811, a 100-day moving average, analysts said. The currency has been closing daily sessions stronger than the average since early February.