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Room For Asian Currencies To Strengthen Further In 2010
Malaysia Perspective | 10 June 2010

Written by Inter-Pacific Research

Singapore’s decision to revalue its currency to prevent economic overheating can prompt policy makers in China and other Asian nations to start withdrawing monetary stimulus especially with growth in the region outpacing the rest of the world. The Monetary Authority of Singapore (MAS) uses its currency as opposed to interest rates to conduct its monetary policy. With the decision to re-centre its exchange rate policy band by shifting to a stronger trading range, the Singapore dollar rose by 1.2% to S$1.3754, the most in a year.

Singapore’s decision came about although China, South Korea and Indonesia have left their rates unchanged. The move by Singapore is a signal that other nations in the region will adopt the same policy in the near future. It opines that Asian central banks are mostly ‘behind the curve’ in tightening monetary policy. Inflation pressure will step up in 2010.

The general expectation is that other regional currencies would appreciate as well in view of: (1) Asia ex Japan (AxJ) GDP growth will remain vibrant as opposed to a modest recovery from developed nations; (2) Normalising of monetary policy will be much earlier in AxJ with rising interest rates as opposed to developed nations; (3) External surpluses will remain high in AxJ; (4) Equity valuations in AxJ could continue to benefit from capital inflows; and (5) CNY gain against US$ would make AxJ currencies more tolerant for appreciation.

View On AxJ Currencies Vis-À-Vis US$
* Chinese Yuan (CNY) to strengthen to 6.60 in 2010: US$/CNY could be revalued before July 2010 as the Chinese authorities could be waiting for a clearer picture with respect to the strength of their economy. It is of view that CNY would strengthen to 6.60 in 2010 from earlier forecast of 6.65;

* Korean Won (KRW) to strengthen to 1040 in 2010: We found the Korean Won (KRW) somewhat tracks closely to CNY especially between the period mid-2005 to early-2008 due to strong trade ties with China. We have revised upwards our projection for KRW to 1040 in 2010 from our previous projection of 1100;

* Taiwan Dollar (TWD) to strengthen to 30.6 in 2010: Appreciation of TWD would be more gradual. The underlying reason being inflation is expected to remain weak, thus giving ample breathing space for its monetary authority to keep interest rates low. The revised forecast for TWD is 30.6 in 2010, from 31.0;

* Indian Rupee (INR) to strengthen to 43.0 in 2010: There were weak relationship between INR vis-à-vis US$/CNY. Nonetheless, the view is that the Indian rupee will continue to strengthen in 2010. The economy is able to absorb a stronger currency in view of higher productivity growth, concern over inflation and the prospect of strong capital inflows. This suggests room for further tightening of its monetary policy. Therefore a revised upwards of forecast to 43 in 2010 from 44.1 previously;

* Indonesian Rupiah to strengthen to 8,800 in 2010: Like the Indian Rupee, Inter-Pacific Research found the relationship between Indonesian rupiah and US$/CNY to be low. Nonetheless, it appears that Bank Indonesia (BI) remains concern over the development of asset bubbles. This could well indicate the desire to have a stronger rupiah. Therefore, 2010 projections have been revised upwards to 8,800, from 9,000 previously;

* Malaysian Ringgit (MYR) to strengthen to 3.15 in 2010: The MYR is closely correlated to the CNY. MYR have appreciated strongly, which Inter-Pacific Research believes is due to; (1) the anticipation of a stronger US$/CNY; (2) better economic outlook; and (3) fear of potential inflation. Nonetheless, the upside to MYR is somewhat limited and hence revised the 2010 projection to 3.15-3.18 from 3.20 previously;

* Thai Baht to strengthen to 31.3 in 2010: The primary concern in Thailand for now is their political uncertainties. This can put a lid to the upside growth of the economy in 2010. Nonetheless, Inter-Pacific Research continues to hold on to the view that the Thai Baht will continue to appreciate in 2010. The projection has now been raised to 31.3 in 2010 from 31.9 previously; and

* A revised upward projection for the Philippine Peso and Singapore dollar in 2010: The expectations are 43.0 for the Philippine Peso in 2010 from 44.1 previously and 1.31 for Singapore dollar in 2010 from 1.38 previously.

Potential Risks For AxJ Currencies
The potential risks for AxJ currencies in 2010 will largely revolve around the following issues: (1) Should the central banks tighten too much, it can put a lid to the upside growth of GDP; (2) If the central banks initial monetary tightening turns out to be weak, fears are it may not be able clamp overheating and asset bubbles; (3) Strong capital inflows from monetary tightening may result to selective capital controls; and (4) The risk of China not revaluing its CNY in 2010 and delaying it into 2011 may not augur well as we expect trade friction with US and hence push down AxJ currencies later in 2010.

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