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Asian Currency Plays
Malaysia Perspective | 11 May 2011
By: Andy Chiok
Articles (1) Profile

Despite the earthquake in Japan, Standard & Poor’s is just as positive about Asia, maintaining that Asia ex-Japan GDP growth will slow only marginally in 2011.

This is, but old news.

What’s interesting is that central banks in Asia will try to smoothen out this spurt with fiscal and monetary policies, and text books will teach that increases in interest rates (to dampen borrowings) are in line. This will add to the attractiveness of assets – real estate and local currency bonds – in Asia. More importantly, it will mean that Asian currencies, rather than G3’s will take centre stage. “Asian governments will allow their currencies to appreciate to fight inflationary pressures,” according to Axel Merk, Portfolio Manager of the Merk Asian Currency Fund. “After years of straight-jacketing the Renminbi, the Chinese government is now slowly starting to let market forces do their work on the undervalued currency, unleashing dynamics and potential profit opportunities throughout currencies in the region,” says Merk.

In its market report “Asia Outlook and Strategy 2011: Ball in Asia’s Court”, Credit Agricole CIB also expects Asian rates to rise even though the same is expected of US Dollars rates. The Private Banking Group is expecting Asian rates to shift higher and Asian curves to steepen in the first half of 2011.

Why Currency?
The currency asset class provides portfolio diversification through its low correlation to other asset classes and potential profit opportunities resulting from market inefficiencies and macroeconomic trends. Additionally, the currency asset class exhibits low levels of volatility and high liquidity relative to other assets, such as equities and fixed income.

Currency returns are lowly-correlated with traditional asset classes. This is probably due to the fact that currencies are driven by a set of different factors from that which drives the performances of traditional asset classes, hence the diversification benefits.

This is Asia’s Time!

“It is only natural that as Asian economies grow stronger so too will their currencies. This is very much a sign of Asia’s success.”
- Anoop Singh, Director of the IMF’s Asia and Pacific Department

Asian economies will expand 8.4 percent this year, far out-pacing the 2.5 percent growth of developed economies according to estimates by the International Monetary Fund (IMF). This charge will be led by China, which is projected to grow at 9.6 percent and India at 8.2 percent.

The six major ASEAN countries of Indonesia, Malaysia, Singapore, Thailand, Vietnam and the Philippines have also rebounded from the global economic crisis and growth have returned to pre-crisis levels. In a report by OECD Development Centre’s 2010 Southeast Asian Economic Outlook, growth will average 6 percent for ASEAN from 2011 – 2015, which is about the level for 2003 – 2007.

Source: OECD Development Centre (MPF-SAEO 2010)

Against this backdrop, it makes perfect sense to invest in Asian currencies rather than to ‘bet for’ any rebound in US and/or European equities. (Outlooks for US markets are often conflicting. While Barclays Capital, for instance, is more constructive regarding US corporate earnings, expecting the S&P500 to reach 1450 by the end of 2011, Thomas Lee, Chief Strategist at JP Morgan Chase & Co sees no earnings growth. Expectation of growth in Europe is subdued. Morgan Stanley’s outlook is “Bumpy, but should be better than bonds.” The writer of this article is of the opinion that the US is caught in a liquidity trap. Further, US banks are prevented from creating credit due to inherent problems with the banks themselves – that is, inadequate capital adequacy ratio. Then there is the housing issue, debt financing at the federal level, unemployment. As for the Eurozone, the least said, the better.)

In tandem with economic growth, Asian currencies have strengthened for a third week at the time this article is written. This has been the longest run since October as overseas investors adds to holdings of regional assets to benefit from the world’s fastest economic growth. The Bloomberg-JPMorgan Asia Dollar Index, which tracks the region’s 10 most-traded currencies, has risen to a 13-year high as foreign-based funds has bought about USD 3 billion more South Korean, Taiwanese and Thai equities than they have sold this week. China, India, Indonesia, South Korea, Taiwan, the Philippines and Thailand have all raised interest rates this year to tame inflation, boosting the yield advantage over developed nations.

The Bloomberg-JP Morgan Asian Dollar Index

Morgan Asian Dollar Index creates a benchmark for monitoring Asia’s currency markets on an aggregate basis. It is a spot index of emerging Asia’s most actively traded currency pairs valued against the U.S. dollar.

Recently, Bloomberg has reported that both the Indonesian rupiah and the Thai baht have led gains in Asian currencies on speculation that policy makers in the respective countries will tolerate rate increases in the face of economic growth and inflationary pressures. The Thai economy has grown at the fastest pace since 1995. The Indonesian economy has been relatively resilient to the global economic recession, thanks to its large domestic market and higher international prices of exported commodities. In Singapore, the MAS has signaled a preference for increased rates to combat imported inflation while the Malaysian ringgit is trading near a 13-year high after a report on Feb 18 has shown that gross domestic product for the last quarter has increased more than forecasted.

It is natural, then, to expect investors to park their funds with Asian currencies, or is it? A search through Fundsupermart has indicated two currency funds, none of them focused on Asia, though. Dollardex, another platform for unit trusts does not feature any currency-themed funds at all. Worse yet, there are not a lot of Exchange Traded Funds for investors to invest in. One exception is the Merk Asian Currency Fund (not an ETF).

Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd has told Bloomberg in an interview that there is really nowhere else for investors to put their monies as the US is still the strongest and deepest market in the world. Is this Blind faith or myopia? You be the judge.

    Currently a communications specialist, Andy has also spent 15 years in banking & finance dealing with derivatives, FX, Equities, and Wealth Management. He is a Certified Financial Planner (CFP) and holds an MBA from South Australia. Andrew also has a professional diploma in banking & finance from the Institute of Banking & Finance.

    Please click here for more information about this author.

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