Intervention Cease-Fire Making Victors of Asia Bulls: Currencies

South Korea and Taiwan have declared a cease-fire in Asia’s currency wars.

The Korean won and Taiwanese dollar posted the biggest gains among 11 Asian currencies tracked by Bloomberg this month through April 18 on speculation their central banks have stepped back from intervening to weaken the exchange rates. The won touched a 5 1/2-year high of 1,031.55 per U.S. dollar on April 10, which allowed Taiwanese policy makers to let their currency reach a three-month high of NT$29.91 the same day.

“The won’s strength is giving the Taiwan dollar room to gain because the economies compete, to a certain extent, on exports,” Frances Cheung, the Hong Kong-based head of Asian rates strategy at Credit Agricole SA, France’s third-biggest bank, said April 17 by e-mail. “Korean authorities” are “less worried about appreciation,” she said.

The Asian economies compete with one another in shipping electronic components overseas, and both count China, the world’s second-largest economy, as their biggest export market. A lower exchange rate makes a nation more competitive in selling goods, and traders have speculated for years that Taiwan and South Korea have regularly entered foreign-exchange markets to sell and weaken their currencies.

Emerging Markets

Intervention by both central banks has become less important after a slide in the currencies earlier this year. Now, with 17 of 24 emerging-market currencies rallying this month, there’s also less need for South Korea and Taiwan to make themselves competitive.

“There’s no great justification for Korean intervention at the moment,” James Huh, an economist at Samsung Securities Co. in Seoul, said by phone on April 17. “Emerging-market currencies are appreciating overall, and it will be hard to guarantee intervention will be effective.”

Bank of Korea officials have warned several times since last year that they may intervene to counter the “herd behavior” of currency speculators, and strategists speculated they moved beyond rhetoric to sell the won and defend a level of 1,050 per dollar. South Korea’s intervention has tended to be more active in the face of appreciation, and the authorities’ actions should be limited to smoothing disorderly market conditions, the International Monetary Fund wrote in a report released April 17.

Intervention has cost Korea’s central bank 39 trillion won ($37.5 billion) since the start of 2009, Morgan Stanley estimates. Policy makers stepped up their actions whenever the won approached 1,048 per dollar, strategists led by Hong Kong-based Geoffrey Kendrick wrote in an April 9 report.

Korean Exporters

South Korean exporters have become less vulnerable to exchange rates, Finance Minister Hyun Oh Seok told reporters in Seoul on April 9, while declining to comment on whether the nation intervenes. The central bank will act to stabilize markets, BOK Governor Lee Ju Yeol said at an April 10 press briefing.

Taiwan tends to intervene in the currency market minutes before daily trading ends, according to traders who asked not to be identified. The Taiwan dollar is determined by the market with the central bank helping to maintain its “stability,” Harry Yen, deputy director-general of the bank’s currency department, said by phone on April 11.

“Taiwan’s central bank benchmarks itself against Korea, which it regards as a trade competitor,” Wai Ho Leong, a senior regional economist at Barclays Plc in Singapore, said in an April 14 phone interview. “They always try to underperform the won and pay attention to its day-to-day movement.”

Currency Forecasts

Barclays sees Taiwan’s currency climbing to NT$30 to the U.S. dollar by year-end, from NT$30.25 in Taipei today, putting it in line with the median estimate in a Bloomberg survey of 24 strategists. The U.K. bank sees the won at 1,050 per dollar, compared with 1,039.07 today and a median forecast of 1,051.

South Korea’s won gained 2.5 percent versus the U.S. dollar this month, which as well as being the best performance in Asia is the second biggest advance among 31 major global currencies tracked by Bloomberg after Colombia’s peso. The Taiwan dollar’s 0.8 percent appreciation puts it on course for its best month since September.

South Korea and Taiwan stepping back from intervention marks a pause in Asia’s currency war, a term coined in 2010 by Brazil Finance Minister Guido Mantega to describe the competitive devaluation of exchange rates to boost exports.

U.S. Warning

The U.S. Treasury warned both central banks about involvement in foreign exchange in its semi-annual report on international economic and exchange-rate policies presented to Congress on April 15. It urged South Korea and Taiwan to limit foreign-exchange intervention to “exceptional circumstances of disorderly market conditions.”

Now that the central banks seem to have heeded the U.S.’s warnings, options traders are becoming more bullish about the South Korean and Taiwan currencies.

The premium that investors pay for one-month contracts giving the right to sell the won over options to buy narrowed to 0.75 percentage point on April 11, the smallest on a closing basis since January 2013 and down from 1.69 on March 20, data compiled by Bloomberg show. The premium on similar contracts for Taiwan’s dollar shrank to a one-month low of 0.49 percentage point on April 10, from 0.8 on March 21.

China Trade

Improving exports are giving the two central banks breathing space to reduce currency market intervention. South Korea’s exports rose 5.1 percent in March from a year earlier, a report showed this month, faster than the 4.2 percent increase predicted in a Bloomberg News survey. Taiwan’s shipments climbed 2 percent, almost three times the 0.7 percent estimated pace.

Sales to China accounted for 26 percent of South Korea’s exports last year and contributed to its record $79.88 billion current-account surplus. Exports to the biggest Asian economy made up 39.7 percent of Taiwan’s exports.

“Korean exports have been quite resilient, despite a strong currency,” Prashant Singh, lead portfolio manager for Asian emerging-market debt at Neuberger Berman Group LLC in Singapore, said in an April 15 phone interview. “That’s one of the factors that will make authorities more tolerant of currency strength. Reduced intervention in the won will play a role in the intervention patterns of Taiwan’s authorities.”

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