Asian central banks will devalue competitively, analyst says

By Patricia Lui
Bloomberg News
Tuesday, January 20, 2009

http://www.bloomberg.com/apps/news?pid=20601087&sid=atqsxuWIi9Q4&refer=home

SINGAPORE -- Asian central banks will pursue competitive devaluation of their currencies in the first half of the year and cut interest rates to buffer the impact of a global economic slump, Royal Bank of Scotland Group Plc. said.

The U.S. dollar's rise against other major currencies in the second half of the year as benchmark policy rates of developed economies converge will also exert pressure on Asian currencies, wrote Chia Woon Khien, a Singapore-based interest rate strategist at the bank in a note today. Investors should sell the Taiwan dollar, the Malaysian ringgit and Singapore’s currency, she wrote.

"Competitive devaluation will be more of a policy choice rather than a market-driven event given Asia's relatively stronger economies compared to a decade ago," she said.

The Taiwan dollar trades NT$33.629 versus the greenback as of 11:45 a.m. local time, according to Taipei Forex Inc. The Singapore dollar is at S$1.5014 and the ringgit at 3.6055, according to data compiled by Bloomberg.

Interest rate cuts by Asian central banks will continue this year and will damp appetite for carry trades, Chia said in the note. "The global carry trade is dead and in Asia, flat forward curves in the currency markets offer poor risk-reward," she said.

In carry trades, investors get funds in a country with low borrowing costs and invest in one with higher interest rates, earning the spread between them.

Investors should buy the dollar and sell the Indonesian rupiah, the Philippine peso, India's rupee and the Hong Kong dollars in the forward markets, the note read.

... Indonesia NDF

Indonesia's 12-months non-deliverable forward trades at 12,575 to the dollar, suggesting an 11 percent decline in a year’s time from 11,230 currently traded in the onshore market.

Forwards are agreements in which assets are bought and sold at current prices for settlement at a later specified time and date. Non-deliverable forwards are settled in dollars rather than the underlying asset.

Singapore's central bank will likely adopt a weak currency policy this year, the note read. The government said over the weekend it will revise its 2009 economic growth forecasts for the second time this month as it expects the recession to deepen.

"The Monetary of Authority of Singapore's only viable policy option is to adopt an outright depreciation policy to track the Fed’s quantitative easing," the note read.

Investors should sell the Singapore dollar against a basket of major currencies consisting of the greenback, euro, New Zealand's dollar and yen in a ratio of 56:28:11:5, Chia wrote.

... China Yuan

China's yuan strength stalled against the U.S. dollar since middle of last year after gaining in the first half, triggering speculation that Beijing has halted the currency’s appreciation to aid exporters hurt by the slumping global economy.

The currency has slipped 0.2 percent against the dollar since the start of the year after gaining 6.6 percent last year.

"China will strive to maintain a steady yuan to the U.S. dollar but the challenge is mounting," Chia's note read.

Asian central banks embarked on hefty interest rate cuts in the second half of last year as economic conditions deteriorated with the global credit crunch and inflation eased amid the fall global oil prices.

"Rate cuts are not over and for Korea, Taiwan, and Thailand, we are expecting more aggressive rate cuts than the market," Chia wrote. "Korea and Taiwan interest rates have the greatest scope for further declines, led by the front end of the curve."

Investors should bet on this by receiving "the front end of the interest rate swap curves in Korea, Taiwan, Thailand, and Singapore dollars," the note said.

In an interest-rate swap, two parties agree to exchange fixed payments for variable-rate payments over a set period. Typically, one agrees to pay a fixed rate, while the other pays a rate that fluctuates with a benchmark index or formula defined in the contract.

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