Big rally in Asian currencies signals 'sell'

Analysts say exchange rates are looking divorced from weakening economies

PUBLISHED : Thursday, 09 May, 2013, 12:00am
UPDATED : Thursday, 09 May, 2013, 4:39am

The biggest rally in Asian currencies since September is a sell signal to two of the world's largest foreign-exchange trading firms, as the region's economic growth increasingly falls short of forecasts.

The Bloomberg-JP Morgan Asia Dollar Index of 10 currencies has climbed 1.3 per cent over the past month to 118.6, approaching the reading of 118.89 on January 18 that was the highest since September 2011. The South Korean won's 4.6 per cent rise outpaced all currencies in the period, while the Malaysian ringgit is at a 21-month high.

The rise, driven by investor demand for higher-yielding assets as the world's biggest central banks begin a new round of efforts to keep interest rates at record lows, is colliding with slowing Asian export and manufacturing growth.

According to an index drawn up by Citigroup, the region's economies are missing analysts' predictions by the most since July.

Manik Narain, a currency strategist at UBS in London, said: "Across Asia, we're starting to see the slowdown in exports spilling over to weaker domestic demand.

"Asian currencies are starting to look divorced from economic fundamentals. Markets are not looking beyond liquidity. We think that will result in disappointments over the medium term."

UBS recommended late last month that investors buy the US dollar against a basket containing the Indian rupee, ringgit, Thai baht and Taiwan dollar because of waning export growth in those countries.

Citigroup strategists Gaurav Garg in Singapore and Weisheng He in Shanghai wrote in a report earlier this month that the won and the Taiwan and Singapore dollars were likely to depreciate as the greenback rises on stronger US growth.

Citigroup handled 12.3 per cent of global currency trading, second only to Deutsche Bank, according to a survey by Euromoney Institutional Investor in May last year. UBS had a 10.5 per cent share of the market.

The Citigroup Surprise Index for Asia-Pacific, which compares economic data to analysts' forecasts, fell to minus 44 on Tuesday, the lowest level since July 3, from 25.5 in March. A negative reading signals economic data falling short of expectations.

The last time the gauge was at a similar level was May 11 last year. The Asia Dollar Index lost 1.7 per cent over the following month.

Narain said: "Abundant global liquidity is buoying emerging Asian currencies, though slower growth will prompt central banks to intervene, like Japan, to weaken exchange rates."