Asian and Commodity Currencies Update

AUD/USD and NZD/USD did not crash despite the significantly larger rate cuts by their central banks. The Reserve Bank of Australia cut its cash rate by 100bps to4.25% on dec 2, only to be outdone by the Reserve Bank of New Zealand’s 150bps cut to 5.00%.

After these experiences, the market will probably not be so gung ho about shorting EUR/USD if ECB also surprises with a cut larger than expected.

There is one explanation why rate cuts are not hurting currencies. There is discomfort about buying the USD, because its yield is now too low to be attractive. Certainly not with talks of Fed quantitative easing and a US budget deficit set to cross the trillion dollar mark in the next financial year. US officials are likely to keep up their bearish tone on the US economy as they work towards a large stimulus package. That said, the ECB press conference will be important to see if ECB intends to continue easing monetary policy into next year. Barring any surprises, exchange rates are likely to stay range-bound amidst bad news.

Despite the political crisis in Thailand, the THB has actually held up pretty well compared to its Southeast Asian peers. Ever since the USD bottomed in mid-July, the greenback has risen 6.1% against the THB. Not bad when compared to the IDR (30.3%), SGD (13.0%), MYR (12.8%), and PHP (8.5%). In fact, the ongoing crisis that started in 2006 did not really have a material impact on the USD/THB because it did not interfere in the way the central bank manages its exchange rate. That is, to keep it aligned with regional currencies with as little volatility as possible.

As long as USD looks consolidative, and as the USD/JPY remained above 90 level, Asian currencies should also be range-bound. The three currencies that are remained most vulnerable to risk aversion and a lower USD/JPY are KRW, INR and the IDR with rate cut expectations being priced in in-line with lower CPI readings. A lower CPI reading in these countries should also bolster calls for the country to start easing monetary policy. However, focus has shifted from the Mumbai bombings toward tensions between India and Pakistan.