Asian currencies are poised to keep falling after the biggest decline in eight months as the region’s economy slumps more than investors expect, spurring more interest-rate cuts, according to Citigroup Inc.
Volatility will increase as Europe’s debt crisis hurts demand for Asian exports and prompts global money managers to favor the dollar’s safety over riskier assets, said Nadir Mahmud, the head of Asia-Pacific markets at Citigroup in Singapore, which ranked second in worldwide currency trading volume after Deutsche Bank AG in a Euromoney Institutional Investor Plc (ERM) survey. He has spent 26 years in the industry and oversees a team of more than 1,500 staff in 17 countries.
“The slowdown in Asia which we’ll see in the very near term will catch the markets off guard,” Mahmud said in a May 16 interview. “What you will see is an up move in the dollar and a down move in interest rates which most people are not expecting.”
The Bloomberg-JPMorgan Asia Dollar Index lost 1.8 percent so far in May and is headed for the steepest monthly drop since September. The MSCI Asia-Pacific Index of shares tumbled 10 percent, set for the worst drop since October 2008. The Dollar Index (DXY), which measures the U.S. currency against those of six major trader partners, advanced 3 percent.
India’s rupee, the region’s worst-performing currency this month with a 3.5 percent decline, touched a record low of 54.91 per dollar on May 18. South Korea’s won slid 3.3 percent. The rupee’s one-month implied volatility, a measure of exchange-rate swings used to price options, jumped 350 basis points, or 3.5 percentage points, this month to 13 percent. International investors pulled $6.2 billion from the stock markets of India, Indonesia, South Korea, Taiwan and Thailand this month, according to exchange data.
“You might see some turbulence in local foreign-exchange markets, bond markets and equity markets,” Mahmud said. “In the short term, in a risk-averse environment, the dollar still looks like the king.”
Mahmud said increased volatility will help the bank achieve “double-digit” growth in Asian trading this year. Asian foreign-exchange trading at the New York-based lender, including trades on its electronic Citi FXVelocity system, grew in the past year to $4.3 trillion from $2.5 trillion, boosting its market share to 17 percent, the Euromoney survey showed. The actual volume was “significantly higher,” Mahmud said.
Citigroup’s securities and banking operations, which includes Mahmud’s division, reported a 17 percent increase in first-quarter revenue to $1.2 billion from a year earlier, boosting net income by 46 percent to $307 million.
China’s exports, factory output and inflows of foreign direct investment fell short of economists’ estimates in April, according to government data released this month. Overseas shipments from South Korea, Malaysia and the Philippines shrank, separate reports showed. Central banks of Korea and Indonesia left interest rates unchanged in May.
Policy makers in Asia will probably shift focus to reviving growth from containing inflation, injecting funds into the region’s economies, said Mahmud.
“The policy reaction in the U.S. has been very aggressive,” he said. In Asia, “there are certain central banks that are behind the curve, but slowing economic growth may force them to react,” he said.
Asian currencies will rebound in the longer term as current-account balances and government finances improve, Mahmud said. China had a current-account surplus of $24.7 billion in the first quarter and a similar measure in Korea climbed to a four-month high of $3 billion in March.
“The fundamentals of Asia are positive,” Mahmud said. “Most countries run current-account surpluses and they don’t have huge public debt issues like in Europe. Asia may possibly have some hiccups near term but in the long run, the outlook continues to be very positive.”
Barclays Capital also predicts Asian emerging currencies will weaken over the next month, strategists Olivier DesBarres and Nick Verdi wrote in May 17 research note. The bank cut its forecast on the rupee to 56 from 52 for one month.
“Asian currencies will be forced to weaken against a broadly stronger dollar,” said Sacha Tihanyi, a senior strategist in Hong Kong at Scotiabank, a unit of Bank of Nova Scotia. “When Europe goes through financial strain, it bleeds into the real economy and eventually hits Asian economic growth.”
An economic recovery in China may be delayed without strong policy support, according to Mahmud. The world’s second-largest economy is forecast to expand 8.3 percent this year, the slowest pace since 2001, according to the median forecast of analysts in a Bloomberg survey.
“We haven’t seen a bottom yet” in China’s growth rate, Mahmud said. “You might see a quarter or two of even slower growth than you’ve got now.”
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