Currency Defense Gets Makeover as Emerging Asia Guards Reserves

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Or sign-in if you have an account.my]09mseau{u87i6ywc(cn5p_media_dl_1.png Bloomberg(Bloomberg) — Central banks in emerging Asia are increasingly finding ways to support their currencies without dipping into foreign-exchange reserves, as recurring Middle East tensions and the prospect of higher-for-longer US interest rates keep policymakers on edge.THIS CONTENT IS RESERVED FOR SUBSCRIBERS ONLYSubscribe now to read the latest news in your city and across Canada.Exclusive articles from Barbara Shecter, Joe O'Connor, Gabriel Friedman, and others.Daily content from Financial Times, the world's leading global business publication.Unlimited online access to read articles from Financial Post, National Post and 15 news sites across Canada with one account.National Post ePaper, an electronic replica of the print edition to view on any device, share and comment on.Daily puzzles, including the New York Times Crossword.SUBSCRIBE TO UNLOCK MORE ARTICLESSubscribe now to read the latest news in your city and across Canada.Exclusive articles from Barbara Shecter, Joe O'Connor, Gabriel Friedman and others.Daily content from Financial Times, the world's leading global business publication.Unlimited online access to read articles from Financial Post, National Post and 15 news sites across Canada with one account.National Post ePaper, an electronic replica of the print edition to view on any device, share and comment on.Daily puzzles, including the New York Times Crossword.REGISTER / SIGN IN TO UNLOCK MORE ARTICLESCreate an account or sign in to continue with your reading experience.Access articles from across Canada with one account.Share your thoughts and join the conversation in the comments.Enjoy additional articles per month.Get email updates from your favourite authors.THIS ARTICLE IS FREE TO READ REGISTER TO UNLOCK.Create an account or sign in to continue with your reading experience.Access articles from across Canada with one accountShare your thoughts and join the conversation in the commentsEnjoy additional articles per monthGet email updates from your favourite authorsSign In or Create an AccountIndia has lured nearly $40 billion from its diaspora via high-yield dollar deposits, underpinning a recovery in the rupee from a record low in May. South Korea’s push to accelerate corporate dollar repatriation has helped the won to its biggest monthly gain since 2022. Indonesia drew $1.6 billion in bond inflows in the last two months as it offered incentives to foreign funds, and Taiwan has also been instructing exporters to sell US dollars at times of currency weakness.The measures broaden the toolkit for policymakers, supplementing traditional tools such as interest-rate hikes and foreign-exchange intervention that formed the first line of defense after the Mideast conflict sent oil prices soaring. The spike exposed emerging Asia’s heavy reliance on energy imports, making the region one of the weakest pockets of the currency market. While oil prices have since eased on signs the US and Iran are nearing a deal, several Asian currencies still rank among this year’s worst performers.Get the latest headlines, breaking news and columns.By signing up you consent to receive the above newsletter from Postmedia Network Inc.A welcome email is on its way. If you don't see it, please check your junk folder.The next issue of Top Stories will soon be in your inbox.We encountered an issue signing you up. Please try again“There are a variety of motivating factors, but they essentially come down to preserving FX reserves as best as possible amid structurally higher volatility and uncertainty,” said Claudio Piron, head of Asia FX and rates strategy at BofA Global Research. “Additionally, they are trying to balance the needs of protecting FX stability, while maintaining domestic liquidity. Attracting inflows is a key strategy to achieve this goal.”Indonesia’s rupiah, the Indian rupee and Thailand’s baht rank among the five worst performers this year in a basket of 22 emerging-market currencies tracked by Bloomberg.By contrast, Latin American currencies occupy the top of the rankings, led by the Colombian peso, Brazilian real and the Mexican peso. The region offers higher interest rates than most of its developing-nation peers, and many of its countries are oil exporters, making them relatively insulated from the impact of higher oil prices.“On a total-return basis, Latin American currencies may retain an advantage” because of their higher carry, said Desmond Fu, head of investment management at Western Asset Management in Singapore. “On a spot basis, however, selected Asian currencies could close part of the gap if US yields stabilize, energy-market disruption doesn’t intensify and the AI investment cycle continues to support technology exports and regional capital expenditures.”Several other analysts, including those at Alpine Macro, State Street Investment Management and M&G Investments, say the extent of weakness in Asian currencies has been surprising given a mix of positives including trade surpluses, solid macroeconomic fundamentals, robust exports and buoyant equity markets across the region.This advertisement has not loaded yet.This advertisement has not loaded yet, but your article continues below.“This suggests that the imbalance lies more in the composition of capital flows than in trade fundamentals, meaning FX intervention alone may not be sufficient to address currency weakness,” said Low Guan Yi, head of Asia fixed income at M&G. “Against this backdrop, we expect policymakers to continue broadening the sources of foreign currency inflows.”Meanwhile, in Japan, Asia’s biggest developed market, policymakers appear to be leaning more heavily on foreign-exchange intervention. The first joint yen-buying operation from Japan and the US since 1998 recently helped spur one of the currency’s most notable rebounds.To be sure, EM Asia central banks aren’t abandoning traditional defenses.Bank Indonesia boosted interest rates by 100 basis points in May and June, and has continued to intervene in the currency market, much like its Indian peer. The two countries, along with the Philippines and Thailand, have witnessed Asia’s biggest drawdowns in FX reserves since the start of the Iran war, with declines of 4% to 9%.Authorities in the Philippines have raised rates by 50 basis points, and the Bank of Korea last month tightened policy for the first time in three years. MUFG Bank Ltd. is forecasting two more increases by Indonesia and the Philippines, and at least one more hike by the BOK this year.The path of US monetary policy remains key for investors, especially after three Federal Reserve officials dissented from last month’s decision to hold rates steady. The dissenters also warned that waiting too long to act against inflation could risk the need for even more aggressive policy moves later.“Asian central banks are keeping more firepower given the greater uncertainty around global events including how oil prices, El Nino, US yields and the dollar may eventually pan out,” said Michael Wan, a senior currency analyst at MUFG Bank in Singapore. “Attracting more dollars will be one prong of the strategy.”India, Colombia, Argentina, Poland, Czech Republic, Russia, Romania to release CPI dataMalaysia, Taiwan, Poland, Russia, Romania to release GDP dataRomania and Peru have rate decisions dueMalaysia, Mexico to release industrial productionNotice for the Postmedia NetworkThis website uses cookies to personalize your content (including ads), and allows us to analyze our traffic. Read more about cookies here. By continuing to use our site, you agree to our Terms of Use and Privacy Policy.