Yuan, Indian rupee win as FX investors cherry-pick within Asia

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Consensus thus favours trades that limit exposure to US dollar and exploit intra-regional divergences. (AP) Consensus thus favours trades that limit exposure to US dollar and exploit intra-regional divergences. (AP)
SummaryConsensus thus favours trades that limit exposure to US dollar and exploit intra-regional divergences.

From a rapidly rising Indian rupee to a falling Singapore dollar, 2014 is shaping up to be a year in which investors in Asian currencies will not merely discriminate heavily but also pick trades that reduce exposure to the fickle US dollar.

There is far greater consensus this year than in 2013, when the main drivers of currencies were concerns over when the Federal Reserve will begin tapering its easy policy and how much of money will leave emerging markets.

Analysts and traders alike concur that the Fed's gradual policy tightening will strengthen the dollar, while causing sporadic volatility, and that country-specific factors will become market drivers.

The consensus thus favours trades that limit exposure to the dollar and exploit intra-regional divergences.

The rupee's rally against the Singapore dollar , Thai baht and even the Indonesian rupiah, which along with the rupee was severely hit during last year's volatile selloff of emerging markets, is evidence of investors cherry-picking.

Being long the rupee against other Asian currencies is a top trade for analysts at Citi. Morgan Stanley's Asia analysts recommend likewise.

Analysts at HSBC reckon north Asian currencies such as Korean won and China's yuan could outperform the South Asians, but they also like relative value trades that play off the rupee or won against the Thai baht or Indonesian rupiah.

"These relative value trades are a quicker way to express a relative macro view within Asia and how that can impact Asian currencies, than just a specific dollar-centric view," said Paul Mackel, head of currency strategy at HSBC in Hong Kong.

"You are less tied to what is going to happen to the dollar and what happens with U.S. data. And, some of these Asian currencies trend more, rather than getting caught up in the noise of the U.S. dollar. That is one obvious benefit."

Analysts are most unanimous about the yuan, citing China's proposed financial and economic reform and the push to rebalance the economy inward and away from exports as reasons it will keep appreciating. Investors have been rewarded. Yuan traded offshore has risen more than half a percent against the dollar in the past

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