October 17, 2013

What Separates The Asian Currency?

Asian currency transitions

The improvement in the global business cycle is said to be bullish for local Asian currencies. Differentiation is key in forex trading strategies. BNP Paribas believes that fed tapering and potential bond outflows yet to fully play out. Hence, the broker would position its forex trading strategies on “quality” currencies with strong external positions over the “lower quality” currencies with poor fundamentals. They believe that currencies with strong external positions like the TWD, PHP and KRW should outperform.

On one hand, the IDR and INR currencies better outlook due to the delay to Fed tapering would be short lived as external financing needs pose as setback in the medium term. The SGD, THB and MYR face pressures. These Asian currencies are no longer undervalued. MYB and THB have experienced diminished surpluses. These currencies will not be resilient if the USD strengthens globally.

Asian Exports

The level of global PMI’s signifies Asian export growth will accelerate to a low double-digit pace by year end. The Baltic Dry index leaped by 76% in September. This means that dry bulk shipping is improving. Hence, this bodes well for forex trading strategies for KRW and TWD. Strong current account surplus and very cyclical economies will not be affected by possible Emerging Markets bond fund redemptions.

The Philippine peso appears to be outperforming given its strong external position. The INR is besieged by deficit issues while the IDR is burdened by fragile Balance of Payments. Additionally, there is still a risk for both countries and domestic politics turning more massive in lieu of the 2014 elections.

Fiscal Outlook

Climbing risk of a sovereign downgrade and intensifying fiscal strains will apply pressure to the MYR. The weakening current account surplus in Malaysia and Thailand makes currencies vulnerable. BNP Paribas expects the Monetary Authority of Singapore to maintain its current tightening bias at the October policy meeting in discussing the SGD. The currency outlook will largely depend on the broader USD outlook where a stronger USD bias should dominate as the Fed starts to taper Quantitative Easing in March of 2014.

US Home Sales

Why did the present home sales rise while new home sales fell in recent months in the US? Total existing home sales rose 8% according to the National Association of Realtors from June to August.

According to Goldman Sachs, the divergence reflects the temporary impact of rising mortgage interest rates. The 30-year mortgage interest rates increased sharply from May to July, allowing many home buyers to close their home sale transactions to save them from further rate increases. Hence, closing the sale of an existing home allows the buyer to lock in the current mortgage rate. Another reason why new home sales have not risen as much as investors had expected is that homebuilders have opted to raise prices rather than increasing volumes over the past years. The median sales price of new single-family home sales rose sharply in 2012 and early 2013, exceeding its 2007 peak. According to Goldman Sachs homebuilder analyst, this is likely because builders were constrained by land availability in the early stage of the recovery after the sector being dormant for several years.

Overall, the divergence between existing home sales and new home sales should disappear as mortgage interest rates stabilize. First, existing home sales are likely to fall in coming months due to the “pay-back” effect. Second, the recent declines in new home sales should be temporary and builders may begin to change their strategy from raising prices to increasing volume. This is consistent with our view that new home sales should continue to recover from today’s low levels.


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