SE Asian currencies flat as volatility dies

SE Asian currencies flat as volatility dies

SINGAPORE (Dow Jones): Southeast Asian currencies finished Asian trading on Friday largely flat against the U.S. dollar at the end of a week notable mainly for an unaccustomed lack of volatility in regional foreign exchange markets at a time when markets globally see-sawed with uncertainty.

But with regional currency markets by-passed by investors and with liquidity dwindling to what traders say is among the lowest levels seen since the beginning of Asia's economic crisis over a year ago, there is little likely to lend new direction to Southeast Asian foreign exchange markets over the coming week.

"We have seen a period of tremendous volatility in regional markets, and in the aftermath of that there is a lot of pain and a lot of risk aversion," said Vincent Low, a currency fixed income strategist at Merrill Lynch in Singapore.

Having sustained heavy losses on their ringgit positions when Malaysia imposed capital controls at the beginning of the month, many participants are hanging back from regional markets. Wary of the risk, however slight, that Indonesia and other Southeast Asian countries may follow Malaysia's lead, few are prepared to take positions in regional markets.

"People are licking their wounds, and things are unlikely to pick up at least until the end of the month. There is a lot of red ink around," said Ron Leven, local markets strategist at J.P. Morgan in Singapore.

Meanwhile in the run-up to the end of the quarter, said Leven, uncertainty whether the U.S. Federal Reserve Board will cut interest rates at its Sept. 29, meeting and nervousness about possible contagion from financial instability in Brazil and stock market volatility on Wall Street will help deter players from dabbling in Asian regional markets.

"Directional trades are lacking, because the future is so unclear," agreed Low at Merrill Lynch.

The market's lack of appetite for position-taking was clear on Friday. Against the Singapore dollar, usually the most liquid of regional currencies, the U.S. dollar ended Asian trading at S$1.7200, little different from S$1.7169 late on Thursday and at the same level at which it started the week.

Although there were still market participants keen to sell U.S. dollars to cover their long positions against the local currency, the Singapore dollar failed to rally significantly, leading some traders to detect the presence of the Monetary Authority of Singapore.

"The MAS appears to have defined a range for the Singapore dollar, and we are near the limits of that range now so the MAS has been in buying (U.S.) dollars," said the head of regional foreign exchange trading at a major U.S. bank in Singapore.

With little threat of imported inflation, the MAS is widely believed to be keen to nudge the Singapore dollar lower in order to boost export competitiveness.

Activity in other regional currencies was also subdued on Friday, with little price movement seen in either the baht or the rupiah markets.

Against the baht the U.S. dollar ended the day at 40.6250, barely changed from 40.6400 at Thursday's Asian close.

"There is some liquidity there. We are seeing about US$150 million to $200 million go through a day, but no-one wants to push the market more than 20 satang either way," said the U.S. bank trading chief, adding: "It is very frustrating. How can we make a living without volatility."

Trade in the rupiah was virtually non-existent, said market participants. With proprietary traders still deterred from entering the market by fears the Indonesian authorities may impose capital controls on the rupiah, transaction volume is limited to commercial order flow only, say dealers.

Late in Asian trading the U.S. dollar was quoted at 11,175, little changed from 11,075 the previous day.

Activity in the Philippine peso market was more lively, however, with the local currency sliding against the U.S. dollar following the announcement late Thursday that Philippine Airlines, the national carrier, is to be wound up after sustaining massive losses.

Fears that the airline's collapse may pose a systemic danger to the Philippine banking system, to which it is heavily indebted, triggered a surge of U.S. dollar buying which pushed the U.S. currency up to close at 43.910 pesos. At Thursday's close the U.S. dollar was quoted at 43.785.