Credit Suisse is maintaining its negative outlook for Asian currencies on the back of rising euro volatility and Greek uncertainty. Over the next 12 months, it expects currencies across the region to continue weakening against the greenback. However, that excludes the renminbi, which is to remain stable.
Among the Asian currencies, the South Korean won and Malaysian ringgit are expected to be the worst-performing, says Heng Koon How, senior FX strategist at Credit Suisse Private Banking and Wealth Management.
Weaker won, ringgit
In South Korea, domestic growth recently took a hit as a result of the Middle Eastern Respiratory Syndrome (MERS) outbreak on its shores. Meanwhile, exports have been weakening on the back of higher competition with Japan. Credit Suisse reckons the won could further depreciate to 1200 against the USD over the next 12 months compared to 1125 now.
The ringgit, which has been under high pressure since the start of the year, is expected to continue weakening. “The ringgit has passed its first phase of weakness as a result of falling oil prices between 2H2014 and 1Q2015, when it weakened from 3.30 to 3.70 against the US dollar,” says Heng.
Now, the currency is in its second phase of weakness, under which deteriorating foreign exchange reserves are down by a third since the start of the year to just about US$100 billion now. “Despite the positive assessment from Fitch Ratings, Malaysia’s forex reserves have still fallen against its external debt, leaving Bank Negara Malaysia with little room to stabilise the currency should they need to intervene,” says Heng.
Malaysia’s foreign-owned debt is also the highest in Asia at 50% compared to the 30% average. The risk of that is an outflow of capital from the country should foreign investors liquidate their positions and repatriate the funds. Capital outflows are already accelerating currently, says Heng, who estimates that the ringgit will depreciate past its current low to 3.95 against the US dollar and to 2.85 against the Singapore dollar over the next 12 months.
Yen and RMB stable
Not every currency is headed off the cliff, though. Credit Suisse forecasts that the yen and RMB should stay stable in the coming months.
The movement of the yen will depend on whether the US Federal Reserve hikes its interest rates in September. “Unless there is a rate hike by the Fed and the Bank of Japan responds by expanding its quantitative easing, it is difficult to see the yen weakening further from current levels,” says Heng.
Based on Credit Suisse’s valuations, the yen appears to be “hugely undervalued” and is forecast to trade within the 120-125 range against the greenback.
Despite its central bank implementing a series of rate cuts this year and the recent collapse of its stock market, China’s RMB is expected to remain stable at 6.20 per US dollar over the next 12 months. “The PBOC’s focus is to internationalise the RMB and open up its capital account. Programs to improve cross-border capital flows and raise foreign demand for RMB have progressed well,” says Heng. “This will mute the negative impact of slowing growth and monetary easing on the RMB.”
What does it all mean for the SGD? Heng reckons that while the currency will face downward pressure, it will fall less than the rest of Asia. “Regional currencies are falling and inflation in Singapore continues to weaken, so in that light, it will be hard for the SGD to hold up,” says Heng.
On the other hand, growth in Singapore has held up well with no risk of recession, so the likelihood of a central bank policy easing is not looking very likely for now. “The components of the basket of currencies against which the SGD trades against is very well-diversified with no single trading partner taking up more than 15%,” says Heng.
For example, the ringgit is estimated to contribute about 10% to the currency basket, “which is why even with the ringgit dropping like a rock, the SGD is still holding up relatively well. So, the impact of a steep movement in any one of the currencies is manageable,” says Heng. He estimates that the Singapore will revisit its March trough of 1.40 against the US dollar within the next 12 months.
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Among the Asian currencies, the South Korean won and Malaysian ringgit are expected to be the worst-performing, says Heng Koon How, senior FX strategist at Credit Suisse Private Banking and Wealth Management.
Weaker won, ringgit
In South Korea, domestic growth recently took a hit as a result of the Middle Eastern Respiratory Syndrome (MERS) outbreak on its shores. Meanwhile, exports have been weakening on the back of higher competition with Japan. Credit Suisse reckons the won could further depreciate to 1200 against the USD over the next 12 months compared to 1125 now.
The ringgit, which has been under high pressure since the start of the year, is expected to continue weakening. “The ringgit has passed its first phase of weakness as a result of falling oil prices between 2H2014 and 1Q2015, when it weakened from 3.30 to 3.70 against the US dollar,” says Heng.
Now, the currency is in its second phase of weakness, under which deteriorating foreign exchange reserves are down by a third since the start of the year to just about US$100 billion now. “Despite the positive assessment from Fitch Ratings, Malaysia’s forex reserves have still fallen against its external debt, leaving Bank Negara Malaysia with little room to stabilise the currency should they need to intervene,” says Heng.
Malaysia’s foreign-owned debt is also the highest in Asia at 50% compared to the 30% average. The risk of that is an outflow of capital from the country should foreign investors liquidate their positions and repatriate the funds. Capital outflows are already accelerating currently, says Heng, who estimates that the ringgit will depreciate past its current low to 3.95 against the US dollar and to 2.85 against the Singapore dollar over the next 12 months.
Yen and RMB stable
Not every currency is headed off the cliff, though. Credit Suisse forecasts that the yen and RMB should stay stable in the coming months.
The movement of the yen will depend on whether the US Federal Reserve hikes its interest rates in September. “Unless there is a rate hike by the Fed and the Bank of Japan responds by expanding its quantitative easing, it is difficult to see the yen weakening further from current levels,” says Heng.
Based on Credit Suisse’s valuations, the yen appears to be “hugely undervalued” and is forecast to trade within the 120-125 range against the greenback.
Despite its central bank implementing a series of rate cuts this year and the recent collapse of its stock market, China’s RMB is expected to remain stable at 6.20 per US dollar over the next 12 months. “The PBOC’s focus is to internationalise the RMB and open up its capital account. Programs to improve cross-border capital flows and raise foreign demand for RMB have progressed well,” says Heng. “This will mute the negative impact of slowing growth and monetary easing on the RMB.”
What does it all mean for the SGD? Heng reckons that while the currency will face downward pressure, it will fall less than the rest of Asia. “Regional currencies are falling and inflation in Singapore continues to weaken, so in that light, it will be hard for the SGD to hold up,” says Heng.
On the other hand, growth in Singapore has held up well with no risk of recession, so the likelihood of a central bank policy easing is not looking very likely for now. “The components of the basket of currencies against which the SGD trades against is very well-diversified with no single trading partner taking up more than 15%,” says Heng.
For example, the ringgit is estimated to contribute about 10% to the currency basket, “which is why even with the ringgit dropping like a rock, the SGD is still holding up relatively well. So, the impact of a steep movement in any one of the currencies is manageable,” says Heng. He estimates that the Singapore will revisit its March trough of 1.40 against the US dollar within the next 12 months.
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