SINGAPORE: Emerging Asian currencies fell against the dollar on Monday as China's move to double the yuan's trading band was seen increasing its volatility rather than encouraging it to firm, while renewed worries about the euro zone also hit sentiment.
On Saturday, the People's Bank of China said it would allow the yuan to rise or fall 1 percent from its midpoint every day, effective Monday, compared with its previous 0.5 percent limit.
Dealers and analysts said the step does not indicate China wants faster appreciation in the renminbi in the near term but that it is encouraging more two-way bets in the currency.
Reflecting the market's views, the yuan weakened earlier on the first trading day after the move, trading more than 0.3 percent softer than the central bank's midpoint.
More two-way trade will increase volatility not only in the yuan, but also in other emerging Asian currencies, Standard Chartered said, advising real money funds to raise currency hedge ratios on Asia ex-Japan equities.
"For real money funds, higher CNY spot realised volatility should feed through naturally to higher volatility in Asia ex-Japan (AXJ) currencies, particular SGD, KRW and MYR," StanChart said in a note.
"For real-money funds which can trade options, we recommend buying SGD, MYR and KRW vol as a cost-effective and liquid way of hedging AXJ portfolios," said StanChart, adding higher realised volatility in USD/AXJ should make buying implied volatility more attractive.
Some dealers saw the widening as an easing, saying that Beijing announced it as the world's No.2 economy was faltering. China's first quarter economic growth missed market expectations, data showed on Friday.
Worries about the euro zone's debt problems emerged again with Spain's government bond yields up and the cost of insuring its debt hitting an all-time high on Friday.
"With the move, China saved the RRR cut cards until the end," said a senior dealer at a Malaysian bank in Kuala Lumpur, referring to banks' requirement reserve ratio.
Still, many analysts and dealers said it was premature to conclude China desires a weaker yuan to boost the economy.
They also expect the yuan to appreciate more quickly in the second half when the economy is seen recovering, leading gains in its Asian peers.
"Given PBOC's fixing, it does not seem to be driving the yuan weaker," said Jeong My-young, a senior currency strategist at Samsung Futures in Seoul.
"PBOC recently fixed the midpoint stronger than market rates, indicating its efforts to weaken market expectations for a softer yuan," Jeong added.
Among losers in emerging Asian currencies, the Singapore dollar suffered from stop-loss selling by leveraged players after it weakened past 1.2524 per US dollar, the weakest on Friday.
The South Korean won also shed as market players expected dollar-demand linked to local companies' dividend payments to foreign shareholders.
But traders said they have not seen strong dollar-bids linked to those payments yet.