Asian Currencies in for More Pain after Turbulent First Half

This week, analysts forecast that there will be more wallowing in Asian currencies in the near term. The only respite that the currencies may have from their losses in the first half of the year could come when regional central banks decide to normalize policy and there may be some recovery in China.

Currencies under pressure

A combination of interest rate differentials and elevated commodity prices have put Asian currencies under pressure. In recent weeks, some of these currencies had reached multi-year lows. As central banks in emerging Asia have been unwilling to increase interest rates, there has been an outflow of foreign money for five consecutive months, with the exception of China.

There has been a decline of more than 6.8% in currencies, such as the South Korean won, the Taiwanese dollar, and the Philippine peso, against the US dollar this year. The safe-haven currency has strengthened significantly, while the Indian rupee is close to record lows.

Investors have abandoned stocks and are steering clear of riskier Asian currencies because of rising fears of a global economic recession. Instead, they have turned to bonds and the US dollar, which recently reached a high of two decades against major currencies.

Rate hikes are not very aggressive

Recently, central banks in Asia may have adopted a hawkish stance in order to stem the rising prices, but their focus on economic growth and the relatively lower inflation figures have meant that they have not been as aggressive as the US Federal Reserve when it comes to rate hikes.

Market analysts said that since the Asian rate hikes are going to be significantly at a smaller scale than the Fed, it means that the policy rate differentials will continue to have an impact on Asian currencies. Experts believe that as long as the Federal Reserve continues to tighten its monetary policy, Asian currencies will also feel the pressure.

There could be some stabilization once the hawkishness reaches its peak, but any solid gains will depend on economic growth and the weakening of the US dollar.

China’s recovery

COVID-19 curbs have been lifted in China, which has fueled hopes that the country’s economy will recover and this would mean more inflows for Asia. However, investors are not going to place any big bets before they see some data that can give them an idea of the pace of recovery.

Market experts said that the problem was that China was opening at a time when the global economy has already slowed down significantly. This means that the outward-facing nation will be quite vulnerable entering in the second half of this year.

Indonesia, which is the net commodity exporter and has been sensitive to global policy tightening, has managed to stay resilient. It was able to outperform the rest of the markets because it had reopened after restrictions and had strong commodity exports. Therefore, the only major equity index to have posted significant advancement this year in the region has been the Jakarta Stock Exchange Composite Index (JCI).