Asian Currency Differentiation

Asian currencies have started the year in mixed form, but it would be wrong to generalize the performance of Asian currencies as weak. There have been marginal gains recorded year to date vs. USD in the KRW, TWD, MYR and SGD, reflecting strong capital equity inflows. This contrasts with losses in the IDR, INR, PHP and THB versus USD. Compared to the beginning of 2010 equity capital flows have been far weaker overall, with India, Indonesia, Philippines and Thailand, recording outflows, matching the performance of their currencies.

Clearly investors are discriminating more at the turn of 2011. For example Taiwan has recorded solid equity inflows over recent weeks (over $2 billion year-to-date), matching the strength of inflows registered at the beginning of 2010. It appears that Taiwan stocks have started the year as the Asian favorite, helped by growing expectations of further door opening to mainland investment and tourism. Korean equities have also registered inflows helping to support the KRW, which looks to be good buy over the short term above 1120.

This contrast with outflows registered in other Asian equity markets. A major concern responsible for some of the weakness in capital flows to Asia is the threat of inflation. For example, the selling of stocks in India appears to be closely related to inflation concerns and the hawkish rhetoric of the Reserve Bank of India, which is continuing its tightening path this year. Similarly, the PHP may be vulnerable over the short term following a failed T-bill auction on Monday. Inflation worries have clearly led to a push for higher yields but the bids were labeled as “unreasonable” by the government.

Over coming weeks, further EUR strength will likely give Asian currencies more support as the USD succumbs to further pressure. Continued strengthening in the CNY will also support other Asian currencies given that the CNY fixing has reached its highest level since the July 2005 revaluation.

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