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Foreign Exchange

Asian currencies under fire

Driven by worsening sentiment regarding the Eurozone, Asian currencies are under pressure. The market has sharply increased its expectation that Greece will exit the Eurozone, and USD-Asia and regional volatility has surged.

The effect of ‘Grexit’ on Asia via HSBC:

If the market was to suddenly anticipate that there was an even higher chance that a country could exit the single currency union, then USD-Asia would be under pressure to move even higher, and regional central banks could face a bigger challenge if they aimed to prevent local currency weakness

Yes: FX depreciation in Asia is gathering pace - quite a volte-face from the narrative earlier this year when Asian central banks were fighting appreciation amid a surge in capital flows.

Now, Asian currencies will likely remain vulnerable, especially versus the USD and the JPY, reckons HSBC:

In our view, the INR and IDR remain the most at risk, with authorities also increasingly limited in their potential responses We have long been cautious on these currencies but further weakness cannot be ruled out. Meanwhile, ongoing deterioration in market sentiment will also continue to work against the KRW, MYR and, to an extent, SGD, although these currencies do have greater potential to be bolstered by proactive policy flex. Should we not see the above three developments, then we believe the relative outperformers would be the lower beta, lower volatility TWD, THB and PHP.

Europe is not the only reason for the declining performance of Asian currencies. Weaker global growth outlooks will prove to be a menacing force:

Asian currencies retain a cyclical nature and the recently disappointing global data have no doubt contributed to a higher USD-Asia. With global growth expectations seemingly yet to bottom out, and PMIs also suggesting ongoing weakness, the impetus for Asia currencies to strengthen quickly may be impeded, even if Europe offers more clarity. 

... the flaring up of Eurozone sovereign risk has not always led to Asian currency weakness. In mid-2011, sovereign risk was intensifying but Asian currencies held up. This, in our view, was a function of global growth being on a stronger platform than it is now. Furthermore, the market was not factoring in a high probability that a country could leave the EUR. Hence, sovereign risk mattered but it was expressed more in the bond market than being a dominant fear factor for Asian currencies.

HSBC highlights three essential developments in order for regional currencies to strengthen: 

A stabilisation of stresses within the Eurozone; Global growth expectations to bottom out; and Proactive policy choices to reflate regional economies

While you wait for those flying currency pigs, here's a nice chart that highlights regional exchange rates will remain beholden to top-down macro calls as a binary risk-on/risk-off mentality remains cyclically entrenched in global portfolio allocation.

 Source: HSBC
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