ASIAN CURRENCIES WILL REMAIN BUFFERED FROM STRESSES WITHIN GLOBAL ECONOMY

KUALA LUMPUR, Sept 2 (Bernama) -- Asian currencies will remain buffered
from the stresses within the global economy with prudent policies in Asia and
stronger underlying flows.

This combined with a much more negative US dollar outlook, says Paul Mackel,
HSBC Head of Asian Currency Research in the HSBC Global Research Report.

"Over the past few years when the US economy slowed more than expected, we
would see the USD strengthens, and vice-versa," said the report.

But since March this year, the US economic activities data have been
significantly weaker than expected, but the USD has failed to strengthen.

Furthermore, it will be difficult for the USD to stage a significant rally
if the market has come to think that more Quantitative Easing (QE) by the
Federal Reserve could eventually be around the corner.

As such, it has become harder to justify buying the USD outright in bad
times -– possibly hinting at a shift in the USD’s reserve currency status.

The USD has not consistently benefitted in a "risk off" environment but some
Asian currencies are still sensitive to deteriorating market conditions.

The South Korean Won(KRW), for example, is the most sensitive currency to
the ebb and flow of "risk on–risk off" dynamics.

So when market conditions deteriorate (risk off), the KRW is put under
downward pressure.

However, KRW weakness runs into strong headwinds as USD fundamentals are
also very weak.

The end result has seen USD-KRW moving in a range, albeit a volatile one.

The Chinese Renminbi (CNY), at the other end of the spectrum, is not very
sensitive to "risk on-riks off" dynamics, suggesting the Chinese currency
movements more a function of policy.

"In our view, CNY strength will continue helping authorities fight
inflation. The Chinese renminbi remains one of our preferred currencies in the
region.

"With inflation still a burning issue in Asia, we believe policymakers do
not necessarily want their currencies to weaken," said the research report.

This helps to explain why there are some evidence of intervention to limit
upside pressures of USD-Asia (i.e. USD selling).

Asian currencies are not a safe haven. However, neither is the USD, based on
the views provided by the HSBC Global Research.

That, and the more supportive flow backdrop, suggests that USD-Asia will not
spike sharply higher.

"We would still look to sell USD-Asia on rallies, with KRW and SGD the most
likely to benefit from any return to ‘risk on," said the HSBC Global Research.

Key to this would be a stabilisation in global economic data relative to
expectations, the report added.