Asean Currencies End Month of Two Halves as China Spoils Rally

  • Fed rate signal and commodity-price weakness also take toll
  • Ringgit, rupiah and baht gave up gains as October wound down

October’s rally in Southeast Asian exchange rates has slammed into reverse amid prospects for higher U.S. interest rates and a Chinese-induced currency war.

The Malaysian ringgit has given up much of its gains since peaking on Oct. 9, while the Thai baht and the Singapore dollar are set for a second week of losses. Indonesia’s rupiah led a surge in emerging-market currencies this month before losing momentum in the last couple of weeks and falling 1.2 percent on Thursday after the Federal Reserve indicated it might raise borrowing costs in December.

The economy of China, the major export market for most Southeast Asian nations, is relying on interest-rate cuts and a weaker yuan to sustain momentum, risking a currency war as countries safeguard their competitiveness. The downtrend is bad news for the prices of commodities like oil and coal on which the economies of Malaysia and Indonesia depend.

“Exports continue to contract and the full impact of the growth slowdown in China has yet to be fully felt,” said Khoon Goh, a Singapore-based senior currency strategist at Australia & New Zealand Banking Group Ltd., the top forecaster for emerging Asian currencies in the last quarter in Bloomberg rankings. “We’re set for a continuation of the weakening trend of Southeast Asian currencies.”

Currency Forecasts

The rupiah has advanced 7.4 percent in October and the ringgit and baht are up 2.1 percent. That compares with respective month-to-date gains of 9.2 percent, 6.6 percent and 3.4 percent on Oct. 15. ANZ forecasts the ringgit will drop a further 1 percent by year-end, the baht will fall 3.8 percent and the rupiah will lose 5.3 percent.

October’s exchange-rate advances have spilled over into local-currency sovereign bonds, with Indonesian notes returning 6.3 percent in the past month, followed by 1.6 percent for Malaysian securities and 1.2 percent for Thai paper, Bloomberg indexes show. Those gains are at risk of reversing in Indonesia and Malaysia due to the relatively high level of foreign ownership of their debt, according to Nomura Holdings Inc.

“The pressure on the currency markets will continue to weigh on Indonesia and Malaysia,” said Vivek Rajpal, a rates strategist at Nomura in Singapore. “With the vulnerability still high in Malaysia and Indonesia, I would be careful in owning” the two nation’s government bonds, he said.

Commodity Weakness

The slowdown in China, the world’s biggest consumer of commodities, has weighed on prices. A Bloomberg gauge of 22 raw materials rose 3.6 percent, the most since July 2012, in the first full week of this month but has since given up those gains and is hovering near a 16-year low. Indonesian exports have fallen for 12 straight months and Thai shipments have declined for eight consecutive months through August.

ABN Amro Bank NV, the second-most accurate forecaster of emerging Asian exchange rates last quarter, sees the rupiah weakening 4.6 percent by year-end and the baht losing 3.2 percent. Thailand’s status as a net commodity importer should support the baht over time, said Roy Teo, a senior currency strategist at the Dutch lender in Singapore. ABN Amro doesn’t make projections for the ringgit.

China’s economy grew 6.9 percent last quarter and is headed for its slowest annual expansion in a quarter of a century even after six interest-rate cuts in less than a year. The nation needs average annual growth of at least 6.53 percent over the next five years, Premier Li Keqiang said in a speech last week, according to people familiar.

The risk is that China’s central bank may repeat August’s devaluation of the yuan to safeguard exports and growth. Pacific Investment Management Co. said this month it sees the yuan weakening another 7 percent.

“Slowing Chinese growth, a likely sustained period of low commodity prices and rising indebtedness are all taking a toll on emerging-market fundamentals,” said Rohit Arora, an interest-rate strategist at Barclays Plc in Singapore “The narrative for emerging markets is unlikely to change materially in the medium term.”

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