One thing for sure, Asian currencies will not be moving in the same direction as they did for the past 2 years, i.e. appreciating against the USD. Rising food and oil prices and its impact on inflation, delayed monetary tightening by central banks, rising fiscal and external deficits, risk of slowing domestic demand and growth are weakening investor sentiment, leading to equity sell-off, volatile bond markets and FII outflows hence putting downward pressure on Asian currencies.
Let's look at the ones struggling with higher inflationary risks relative to growth issues: India, S.Korea, Thailand, Philippines and Indonesia intervening in currency markets to prevent large depreciation and the inflationary impact of oil imports.
The other group are those with oil and commodity exports, strong FDI prospects, fiscal and trade positions may be less vulnerable than their Asian peers. Mainly in Asia we are talking about Malaysia solely. That fact seems to off the radar of most economists. They tend to lump Asian countries with a big wide swath. The ones with strong surpluses include Singapore, Taiwan, China and Malaysia again.
Appreciation bias to control import prices but concerns of slowing exports, economic growth will be a challenge for China. China does not really have a growth problem, theirs is still one of controlling prices, hence the yuan has been allowed to rise rapidly over the last 2 months while other Asian central banks have maintained status quo. We saw a faster pace of appreciation against USD since Nov (CNY/USD rose 4.3% by early April).
The ringgit used to track yuan's movements closely but Zeti has left rates unchanged and the ringgit has been slightly weaker because of that. India, Vietnam and S.Korea have been trying to contain currency decline and import inflation but is hampered by slowing domestic economic growth and rising trade deficits. Coupled with firm intervention in the USD by U.S., their efforts have been stifled. There is now a low possibility of further Fed rate cut.
Hence any rate hike by Asian countries will provide upside for their currencies going forward. However, currency investors will be also looking at overall growth picture and balance sheet as well. I expect the currencies for Malaysia, Taiwan and Singapore to continue its rise in 2H 2008 as growth is still OK and fighting imported inflation via a stronger currency is a route they can take. Rapid renminbi revaluation adds to already significant inflationary pressure for importers of Chinese goods and might encourage dollar-linked countries to revalue their currencies.
Taiwan dollar, Malaysian ringgit, Thai baht and Sing dollar will perform better due to current a/c surplus, lower capital dependence. Indian rupee, Korean Won, Vietnamese Dong will continue to weaken as high imports impact current a/c deficit. The recipe for countries to be able to maintain stronger currencies will need to show strong long-term growth prospects, monetary tightening and interest rate differential that may attract capital inflows once domestic/global risks abate.
Conversing about currency outlook is a very important task as its the first determinant to capital flows, and hence also the vibrancy in the respective equity markets.
p/s photos: Aum Patacharapa Chaichua