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Asia’s emerging-market currencies are gaining favor among investors who are banking on the region’s central banks maintaining elevated interest rates and the weakening US dollar. Brendan McKenna, an emerging market strategist at Wells Fargo & Co., believes that the Indonesian rupiah, Philippine peso, and Thai baht are among the top contenders. Moreover, experts highlight that Asian central banks possess substantial reserves to safeguard their currencies, with all regional monetary authorities holding foreign-exchange reserves capable of covering over three months of imports.
According to McKenna, “Asia can outperform in the next few months of the year—a bit of a Santa rally. I like the currencies associated with some of the more hawkish central banks.”
Overall, sentiment seems to be turning in favor of emerging markets. MSCI’s currency index for the asset class recorded a 0.9% surge in the past week, marking its best performance since July. This followed a cooling US labor market, reinforcing expectations that the Federal Reserve has completed its rate hikes. Bloomberg’s gauge of Asian currencies is on track for the most significant three-day rally since July, with the South Korean won and the Indonesian rupiah both gaining over 1% in early trading on Monday.
This rally represents a strong rebound after a challenging year for investors. In Asia, some metrics indicate early optimism. In the options market, traders are the least bearish on currencies from countries like China, India, Taiwan, and South Korea, as per Bloomberg-compiled data on three-month risk reversal.
Furthermore, these currencies have exhibited relative stability. The yuan, Indian rupee, and Malaysian ringgit have been among the least volatile exchange rates in the asset class over the past 30 days.
Analysts suggest that Asian currencies are poised to benefit because local central banks remain committed to tightening policies to prevent the yield gap with the US from widening. Indonesia, for instance, raised its rates last month to support the rupiah, while the Philippines signaled potential rate hikes to curb inflationary pressures.
Aninda Mitra, head of Asia macro and investment strategy at BNY Mellon Investment Management in Singapore, pointed out, “There’s enough exchange rate flexibility, policy market buffers, fundamentals are nowhere nearly as bad, and short-term debts are better.” He also emphasized that the current growth dynamics are far from the vulnerabilities seen during the Asian Financial Crisis.
In contrast, many investors, including Wells Fargo strategist McKenna, are exercising caution when it comes to investing in Latin American currencies, particularly as central banks in Brazil and Chile continue to cut rates. Phoenix Kalen, head of emerging markets research at Societe Generale SA in London, believes this situation does not bode well for currencies in the Latin American region.
Key Points to Watch:
- Inflation data will be released in several countries, including Czech Republic, Brazil, Chile, Colombia, Mexico, Taiwan, Thailand, Philippines, and China. Investors will closely monitor these reports for indications that central banks are taking sufficient measures to control price pressures, especially following a warning from Singapore’s central bank about the potential impact of surging global food and energy prices.
- China will provide producer price, trade, and loan data, offering insights into the health of the world’s second-largest economy.
- Indonesia’s economic growth is expected to slow in the third quarter, with updates on its foreign reserves. The Philippines is anticipated to show an acceleration in expansion.
- Bloomberg Intelligence predicts that Peru’s central bank will cut its reference rate for the third consecutive time.
- Poland is expected to reduce its key rate by another 25 basis points, while Romania’s central bank is likely to maintain its current rates.
