ASEAN currencies in defence position benefit investors

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bahtThe sudden weakness of Southeast Asian currencies, which last month retreated the most in a year after a series of fiscal measures in the region and announced stimulus plans in the US, is actually a good sign for foreign direct investors who now get more for their money in any transaction that involves dollar or dollar-pegged money from outside.

Speculative funds pulled out of regional financial assets in many ASEAN countries, showing sentiment that is shifting back in favour of the dollar and away from regional bonds that got heavily sold off.

The Thai baht slumped after the Bank of Thailand was forced to cut interest rates by 0.25 percentage points to 2.50% at the end of May, lifting the US dollar back to a “healthy rate” above the magical threshold of 30 baht to $1. Investors also went on alert when faced with possible capital controls that would disrupt buoyant capital inflows into the Kingdom that took place in the past.

Malaysia’s ringgit depreciated, as did Indonesia’s rupiah and the Philippine peso, which is good for both, investors and local businesses. The first can be happy about more reasonable asset prices in the target country, and the latter can – at least for now – put aside concerns about overheating economies and dropping exports on currencies that already went out of relation to the world’s reference currency, the US dollar.

Qatar’s currency, the riyal, through its dollar-peg, is also benefiting from the development that helps all foreign investors in Southeast Asia – possibly apart from those at the trading desk – to wrap up deals that would have been significantly costlier just a week ago.

However, the current situation on the foreign exchange markets is not more than a time window, say analysts. With countries such as the Philippines reporting the strongest quarter growth in many years, outpacing China for the first time and becoming the fastest-growing economy in Asia – a condition that usually is associated with a strengthening currency -, the pullback cannot be expected to last long.

This is also a good time for investment in sukuk issued in local currency, especially in Malaysia. Apart from the usually reasonable returns for the long-running Islamic bonds, their value will increase well when local currencies gain their strength back.

However, the two big uncertainties for the currency game in Southeast Asia are the Chinese yuan and the Japanese yen. Both economies are battered, one less, the other more, and it has to be closely monitored what Beijing’s and Tokyo’s role in the current fiscal defence of their regional peers are going to be.

Do you think Southeast Asian currencies will depreciate further on a strengthening dollar? Is there a ‘currency war’ against the West looming that would involve the yuan and the yen? Let us know through Twitter: @insideinvestor

 

This comment is part of Inside Investor’s weekly column series in Qatar’s leading newspaper Gulf Times and is published every Sunday.

Gulf Times

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Reading Time: 2 minutes

The sudden weakness of Southeast Asian currencies, which last month retreated the most in a year after a series of fiscal measures in the region and announced stimulus plans in the US, is actually a good sign for foreign direct investors who now get more for their money in any transaction that involves dollar or dollar-pegged money from outside.

Reading Time: 2 minutes

bahtThe sudden weakness of Southeast Asian currencies, which last month retreated the most in a year after a series of fiscal measures in the region and announced stimulus plans in the US, is actually a good sign for foreign direct investors who now get more for their money in any transaction that involves dollar or dollar-pegged money from outside.

Speculative funds pulled out of regional financial assets in many ASEAN countries, showing sentiment that is shifting back in favour of the dollar and away from regional bonds that got heavily sold off.

The Thai baht slumped after the Bank of Thailand was forced to cut interest rates by 0.25 percentage points to 2.50% at the end of May, lifting the US dollar back to a “healthy rate” above the magical threshold of 30 baht to $1. Investors also went on alert when faced with possible capital controls that would disrupt buoyant capital inflows into the Kingdom that took place in the past.

Malaysia’s ringgit depreciated, as did Indonesia’s rupiah and the Philippine peso, which is good for both, investors and local businesses. The first can be happy about more reasonable asset prices in the target country, and the latter can – at least for now – put aside concerns about overheating economies and dropping exports on currencies that already went out of relation to the world’s reference currency, the US dollar.

Qatar’s currency, the riyal, through its dollar-peg, is also benefiting from the development that helps all foreign investors in Southeast Asia – possibly apart from those at the trading desk – to wrap up deals that would have been significantly costlier just a week ago.

However, the current situation on the foreign exchange markets is not more than a time window, say analysts. With countries such as the Philippines reporting the strongest quarter growth in many years, outpacing China for the first time and becoming the fastest-growing economy in Asia – a condition that usually is associated with a strengthening currency -, the pullback cannot be expected to last long.

This is also a good time for investment in sukuk issued in local currency, especially in Malaysia. Apart from the usually reasonable returns for the long-running Islamic bonds, their value will increase well when local currencies gain their strength back.

However, the two big uncertainties for the currency game in Southeast Asia are the Chinese yuan and the Japanese yen. Both economies are battered, one less, the other more, and it has to be closely monitored what Beijing’s and Tokyo’s role in the current fiscal defence of their regional peers are going to be.

Do you think Southeast Asian currencies will depreciate further on a strengthening dollar? Is there a ‘currency war’ against the West looming that would involve the yuan and the yen? Let us know through Twitter: @insideinvestor

 

This comment is part of Inside Investor’s weekly column series in Qatar’s leading newspaper Gulf Times and is published every Sunday.

Gulf Times

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