Draghi gives Asia FX a gift box, but contents unclear
SINGAPORE, July 27 — The European Central Bank chief’s pledge to save the euro zone boosted most emerging Asian currencies today, but most were headed for weekly falls because of earlier drops rooted in Europe worries.
The South Korean won strengthened for the week, while two others — the Singapore dollar and the Thai baht — were on track to do likewise.
Today, the won enjoyed demand from offshore funds and exporters, while stock inflows provided further support.
Interbank speculators chased the Malaysian ringgit and the Philippine peso. Investors in Manila ignored the central bank’s rate cut late yesterday.
ECB President Mario Draghi said yesterday the bank would do whatever was necessary to protect the euro zone from collapse, boosting hopes that it will move quickly to tackle surging borrowing costs in debt-ridden member countries such as Spain.
Draghi’s comment pushed up not only the euro but also other risky assets including Asian stocks.
Still, investors were reluctant to chase emerging Asian currencies before seeing what comes out of the ECB’s policy meeting next week.
“Asian currencies have recovered on the back of the Draghi comments, in line with the rest of the market. Positioning is an important consideration in this context,” said Callum Henderson, global head of FX research with Standard Chartered Bank in Singapore.
“From here, we think that there may be some short-term retracement, as the market waits for deeds from Draghi rather than just words,” he said.
For more rises, emerging Asian currencies need to see stronger economic data from China, the world’s second-largest economy, Henderson said. Most regional units have eased for the week as the European debt crisis deepened amid skyrocketing Spanish borrowing costs.
The Indonesian rupiah has been the worst performing emerging Asian currency for the week. As of this afternoon, it had slid 0.3 per cent against the dollar on local investors’ dollar demand.
Analysts said Draghi’s comments, coming ahead of the bank’s policy-setting meeting on August 2, could signal a resumption of the ECB’s sovereign bond-buying programme known as the Securities Markets Programme (SMP), which has not been used for months.
BNP Paribas currency strategist Thio Chin Loo in Singapore said today’s gains for most emerging Asian currencies might just be a short-term rebound.
“A question is whether it is sustainable,” she said, adding the ECB needs to take more action, starting with re-activation of the SMP, before emerging Asian currencies could be lifted further.
Another focus for investors will be a two-day policy session of the Federal Reserve on July 31 and August 1 amid increasing expectations that the US central bank could adopt further monetary stimulus.
Market players are also awaiting the US second-quarter growth figure due later today with the median forecast for a expansion of 1.5 per cent, down from the first-quarter’s 1.9 per cent.
Hopes of more policy steps from the Fed and the ECB could keep supporting emerging Asian currencies, some dealers and analysts said.
“More investors are focusing on measures rather than problems. So we may see more rallies (in emerging Asian currencies) for short term, although those may not be as strong as before,” said Jeong My-young, Samsung Futures research head in Seoul.
The won ended local trade up 0.8 per cent against the dollar today, which gave it a 0.3 per cent gain for the week.
The Korean currency is seen facing resistance lines around 1,135 per dollar around session highs of July 5 and 6.
The next target would be 1,132.7, the peak of July 4, if the 1,135 is cleared helped by more short-covering in the euro, dealers and analysts said.
“If we see any signs of solution in Europe, we will see dollar/won lower than 1,135 next week,” said a senior foreign bank dealer in Seoul.
The ringgit rose as much as 0.7 per cent to 3.1500 versus the dollar on demand from interbank speculators.
But the ringgit is unlikely to strengthen past a technical resistance at 3.1450 if the ECB does not take concrete action next week, dealers said.
“Draghi has bluffed markets before. He brought hopes to markets, but he didn’t do what he promised. So, at the ECB meeting next week, we will see if he bluffed again,” said a senior Malaysian bank dealer in Kuala Lumpur.
In the dealer’s view, the ringgit will weaken to 3.1700, around the middle of the ringgit’s recent range of 3.1400-3.2000, if the ECB disappoints markets again.
Interbank speculators lifted the Philippine peso, tracking other risk assets, despite the central bank’s decision to cut interest rates yesterday.
Bangko Sentral ng Pilipinas (BSP) lowered its policy rate by 25 basis points to 3.75 per cent and the lending rate to 5.75 per cent. It made the cut to shield the economy from global headwinds and to try to temper a rising peso.
Market players took profits from the peso’s gains around the session high, dealers said.
But investors were looking to buy the peso on dips, given the country’s strong fundamentals, they added.
“I prefer to sell dollars on rallies. If the 41.90 (per dollar) is cleared, we will look at a test of 41.57 again,” said a European bank dealer in Manila, referring to the session highs of July 23 and July 19, respectively.
The Taiwan dollar rose as strong domestic stocks caused interbank players to chase the island’s currency and exporters also bought it for month-end settlements.
But dividend-linked outflows for foreign financial institutions limited the local unit, dealers said. — Reuters