Asian currencies under fire

If the market was to suddenly anticipate that there was an even higher chance that a country could exit the single currency union, then USD-Asia would be under pressure to move even higher, and regional central banks could face a bigger challenge if they aimed to prevent local currency weakness

In our view, the INR and IDR remain the most at risk, with authorities also increasingly limited in their potential responses We have long been cautious on these currencies but further weakness cannot be ruled out. Meanwhile, ongoing deterioration in market sentiment will also continue to work against the KRW, MYR and, to an extent, SGD, although these currencies do have greater potential to be bolstered by proactive policy flex. Should we not see the above three developments, then we believe the relative outperformers would be the lower beta, lower volatility TWD, THB and PHP.

Asian currencies retain a cyclical nature and the recently disappointing global data have no doubt contributed to a higher USD-Asia. With global growth expectations seemingly yet to bottom out, and PMIs also suggesting ongoing weakness, the impetus for Asia currencies to strengthen quickly may be impeded, even if Europe offers more clarity. 

... the flaring up of Eurozone sovereign risk has not always led to Asian currency weakness. In mid-2011, sovereign risk was intensifying but Asian currencies held up. This, in our view, was a function of global growth being on a stronger platform than it is now. Furthermore, the market was not factoring in a high probability that a country could leave the EUR. Hence, sovereign risk mattered but it was expressed more in the bond market than being a dominant fear factor for Asian currencies.

A stabilisation of stresses within the Eurozone; Global growth expectations to bottom out; and Proactive policy choices to reflate regional economies