SGD among the most sensitive to risk dynamics, says analyst

USD-SGD saw what an analyst described as “something of a breakdown” during the middle of 2011.

Paul Mackel, Head of Asian Currency Research at HSBC, said, “After being fairly resilient for most of the year, many Asian currencies are now under water year to date. The bulk of these losses have occurred in just the past few weeks, as we have seen a sharp re-coupling of some USD-Asia exchange rates with the broader dollar index."

A good example, according to HSBC Global Research, is USD-SGD, which saw something of a breakdown during the middle of 2011 as the USD strengthened against G10 but USD-Asia broadly remained stable. "But the catch up by USD-Asia with the USD’s movements against major currencies in recent weeks has been fierce. However, the rationale for Asian currency weakness comes down to lingering concerns about the Eurozone and liquidity pressures,” noted Mackel.

Here’s more from HSBC Global Research:

The preference for USD liquidity continues, with Asian currencies in a tailspin. With many uncertainties still on the horizon for markets, we see the KRW, IDR, MYR and INR as vulnerable in the Asian currency space. CNH and THB should prove to be relatively more stable within the region.

The recent reversal in USD-Asia leaves many Asian currencies down on the year. This is not a case of the fundamentals having worsened for Asia. In our view, it comes down to the fear surrounding the Eurozone and position adjustment.

Before this sell off, we had seen an intensification of USD funding pressures and Eurozone sovereign concerns take their toll on G10 currencies. Now, Asian currencies have quickly caught up, on the back of these fears spreading. This meant those currencies with the greatest sensitivity to ‘risk on – risk off’ dynamics came under the greatest strain – KRW, SGD, INR versus the USD.

The fear now is that market participants continue to reduce risk across the board. We have already seen relatively large outflows from Asian equity markets this year. If this liquidation spreads further to foreign bond positions, then IDR, MYR and KRW would be at greater risk. But the THB should prove to be relatively insulated given foreign investor positioning in the local bond and equity market is comparatively small. USD-CNH is not immune to position adjustment but the CNH is likely to perform better than a number of Asian currencies in the current environment.

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