Asian FX Focus : In the line of fire

Asian currencies have been under considerable pressure in recent weeks. The latest move has been driven largely by worsening sentiments regarding the Eurozone.

The market has sharply increased its expectation that a country could exit the Eurozone, seeing USD-Asia and regional volatility both moving quickly higher an HSBC Global Research said.

With rising and ongoing uncertainty, asset correlations are likely to pick up, something often associated with increased market stresses.

Under such conditions, we find that INR, IDR, KRW, MYR and SGD tend to under perform the rest of the region.

Meanwhile, the TWD, THB and PHP should be less vulnerable to further weaknesses due to lower volatility.

Beyond Europe, there is another factor working against Asian currencies, namely a weaker global growth outlook. Asian currencies retain a cyclical nature and the recently disappointing global data had no doubt contributed to a higher USD-Asia. With global growth expectations seemingly yet to bottom out, and PMI's also suggesting ongoing weakness, the impetus for Asia currencies to strengthen quickly may be impeded, even if Europe offers more clarity.

The one bright spot is that Asia's policymakers are well-placed to deliver fiscal stimulus to underpin growth, which should help support currencies.

We believe Singapore, China and Korea stand out in this regard, while India and Indonesia face greater policy constraints. However, there is a risk that authorities start to accept greater currency weakness as a means to support the growth outlook.