13 December 2010
Asia to tighten monetary policy by using stronger FX rates
SINGAPORE : Asian central banks are seen tightening monetary conditions via stronger exchange rates in 2011 rather than through higher interest rates, according to Japanese brokerage Nomura.
It said Asian currencies are as much as 10.7 per cent undervalued at current levels and have more room to appreciate next year.
This comes after Asian currencies appreciated on average 4.5 percent this year.
Nomura said we could see a similar appreciation next year.
Inflation in Asia has been on the rise as illustrated by China's November CPI which jumped 5.1 percent year-on-year.
But, as Nomura pointed out, the run-up has been driven largely by food and energy prices.
Core inflation, which strips out volatile food and energy prices, is still low on a historical basis.
This means Asian central banks will be less inclined to react with higher interest rates, which may hurt growth.
Craig Chan, Executive Director, Foreign Exchange Research, Nomura, said: "If you're facing very large real flows, currency undervaluation and, to some extent, inflation risks...then allowing for gradual currency appreciation makes sense.
I think that's what will come through - gradual appreciation.
However, there will be administrative measures coming out to try to reduce potential FX volatility in the markets."
According to Nomura, the standouts next year will likely be the Korean won, which is seen appreciating as much as 9 percent against the US dollar, driven partly by less intervention in the currency markets by the South Korean authorities.
More risky currencies like the Indonesian rupiah and Indian rupee are seen rising as much as 5 percent.
The brokerage said that rising capital inflows would also spur Asian currencies higher.
Foreign financial investors brought in US$372 billion into Asia in the year to June against an outflow of US$136 billion in the previous 12-month period.
While there is no respite in sight for inflows, the situation may not be out of control for monetary authorities in the region.
Mr Chan said: "That is a significant increase in inflows but even though the inflows have been so significant, there's actually only a few regions in Asia where the positioning itself does look very stretched.
I would say it's India on the equity front and on the bond front it's Indonesia."
Nomura believes China has more room to let its currency strengthen.
However as other regional currencies will rise in tandem with an appreciating yuan, there will not be a big impact on the region's export competitiveness.
Asia to tighten monetary policy by using stronger FX rates
SINGAPORE : Asian central banks are seen tightening monetary conditions via stronger exchange rates in 2011 rather than through higher interest rates, according to Japanese brokerage Nomura.
It said Asian currencies are as much as 10.7 per cent undervalued at current levels and have more room to appreciate next year.
This comes after Asian currencies appreciated on average 4.5 percent this year.
Nomura said we could see a similar appreciation next year.
Inflation in Asia has been on the rise as illustrated by China's November CPI which jumped 5.1 percent year-on-year.
But, as Nomura pointed out, the run-up has been driven largely by food and energy prices.
Core inflation, which strips out volatile food and energy prices, is still low on a historical basis.
This means Asian central banks will be less inclined to react with higher interest rates, which may hurt growth.
Craig Chan, Executive Director, Foreign Exchange Research, Nomura, said: "If you're facing very large real flows, currency undervaluation and, to some extent, inflation risks...then allowing for gradual currency appreciation makes sense.
I think that's what will come through - gradual appreciation.
However, there will be administrative measures coming out to try to reduce potential FX volatility in the markets."
According to Nomura, the standouts next year will likely be the Korean won, which is seen appreciating as much as 9 percent against the US dollar, driven partly by less intervention in the currency markets by the South Korean authorities.
More risky currencies like the Indonesian rupiah and Indian rupee are seen rising as much as 5 percent.
The brokerage said that rising capital inflows would also spur Asian currencies higher.
Foreign financial investors brought in US$372 billion into Asia in the year to June against an outflow of US$136 billion in the previous 12-month period.
While there is no respite in sight for inflows, the situation may not be out of control for monetary authorities in the region.
Mr Chan said: "That is a significant increase in inflows but even though the inflows have been so significant, there's actually only a few regions in Asia where the positioning itself does look very stretched.
I would say it's India on the equity front and on the bond front it's Indonesia."
Nomura believes China has more room to let its currency strengthen.
However as other regional currencies will rise in tandem with an appreciating yuan, there will not be a big impact on the region's export competitiveness.
- CNA/ch
