Asian currencies will wallow in the near term, analysts said this week, with any respite from their first-half losses likely to come only in the form of proactive policy normalization by regional central banks combined with a Chinese recovery.
A combination of high commodity prices and narrowing interest rate differentials has piled pressure on most Asian currencies, with some hitting multi-year lows in recent weeks.
Foreign money has flown out of emerging Asia, excluding China, for five straight months amid central banks’ reluctance to raise rates.
The Taiwanese dollar, South Korean won and Philippine peso have all weakened more than 6.8% against a strong US dollar this year, while the Indian rupee is near record lows.
Growing fears of a global recession have forced investors to flee riskier Asian stocks and assets in favor of bonds and the greenback, which recently hit a nearly two-decade high against major currencies.
While Asian central banks have recently become more hawkish in controlling soaring prices, the focus on growth and relatively contained inflation means rate hikes have not been as aggressive as those of the Federal Reserve. American.
“Rate hikes (in Asia) will ultimately be of a smaller quantum and at a slower pace relative to the US Fed. So policy rate differentials will continue to move against Asia,” Duncan Tan, rates strategist at DBS Bank, said.
Of the 13 analysts and strategists polled this week, more than half expect Asian currencies to remain under pressure as long as the Fed’s aggressive tightening persists.
“We may see some stabilization in EMFX once peak hawkishness is reached, but any significant gains will depend on growth and (on) the extent of the pullback in the US dollar,” said Christopher Wong, FX strategist at Maybank. .
Although a rejuvenation of the Chinese economy after the lifting of COVID-19 restrictions could bring flows back to Asia, investors will refrain from making big bets until they see data that allow them to gauge the pace of any recovery.
“The reality is that China finds itself opening up to a slowing global economy. This makes the outward-looking nation vulnerable in the second half of 2022,” said Daniel Dubrovsky, strategist at IG.
A net exporter of commodities, Indonesia, historically seen as sensitive to global policy tightening, has remained resilient this time around, with strong commodity exports and the reopening of COVID-19 restrictions helping it outperform global markets. other markets.
The Jakarta Stock Exchange (JCI) Composite Index is the only major stock index in the region to post significant gains this year, jumping almost 5%.
(Reporting by Harish Sridharan in Bengaluru; Editing by Krsihna Chandra Eluri)