Investors who have a taste for international currencies should keep an eye on Asia, where currencies are in flux, thanks in part to Fed policy here at home.
In fact, Asian currencies are very sensitive to the Fed’s quantitative easing policies, feeling the pinch or the reprieve whenever the Fed makes an announcement. According to Christy Tan, emerging Asia FX strategist for Bank of America/Merrill Lynch, the Fed’s hesitation on slowing QE is likely to bolster Asian currencies in the near term, as well as give a boost to high-yield bonds. Asian currencies have been appreciating of late, and Tan says that is likely to continue, with Asian central banks keeping out of the way.
Further, there’s a pattern to how each Asian currency relates to U.S. policies. Singapore dollars, Indian rupees and South Korea’s won appear most sensitive to changes in dollar index spot prices, Tan said in a research report. In evaluating Asian FX sensitivity to the U.S. dollar, “the regression test … shows that from 2009 to 2013, year to date, the currencies that weaken the most in response to a 1% rise in the dollar index are the Singapore dollar (-0.44%), the rupee (-0.29%), the won (-0.22%) and the Thai baht (-0.20%),” according to Tan.
However, when it comes to Federal Open Market Committee (FOMC) actions, those provoke marked reactions in four currencies: the rupee, the Philippine peso, the Singapore dollar and the won. In addition, those four currencies’ reactions have been greater than in other Asian currencies “to the tune of 1.5-2% whenever a ‘new’ decision was announced,” Tan said.
Another interesting factor is the degree of response of the four currencies that are most reactive to FOMC decisions—the rupee, Philippine peso, Singapore dollar and won, according to Tan. The magnitude of depreciation is greater than that of appreciation. “The average response of [those four currencies] when the FOMC results in depreciation is 0.89%, while the average response of appreciation is 0.66%.”
Andrew Colquhoun, analyst at Fitch Ratings, said that while several emerging Asia currencies “came under pressure in summer 2013 amid mounting concerns over external finances and the sustainability of growth[, a] delay in tapering of U.S. Federal Reserve quantitative easing was followed by some recovery, but the factors that led to the markets’ reassessment of Asian economies have not gone away.”
As a result, “Fitch Ratings thinks credible, coherent economic policy management is likely to remain the most effective shield for sovereign credit profiles” and it has revised its projection for emerging Asia growth downward, he said.