SE Asian currencies rebound in yen's wake

SE Asian currencies rebound in yen's wake

SINGAPORE (Dow Jones): The rebound of Japan's yen from Tuesday's eight-year low relieved the downward pressure on Southeast Asian currencies, which rallied across the board during Asian trading hours yesterday.

After opening up sharply against the U.S. dollar as early profit-taking triggered a massive surge in the yen, Southeast Asian currencies drifted higher still over the rest of a trading session dominated by fears of central bank intervention to support the Japanese currency.

"The whole market is long U.S. dollars, so people would rather take profits than risk getting caught on the wrong side of any intervention," explained one Singapore-based trader of regional currencies.

Although any intervention to boost the yen would inevitably bolster Southeast Asian currencies as well, the mood in the market remains profoundly bearish toward regional currencies over the longer term.

"People are still looking to buy dollars," said the head of regional currency trading at a UK bank in Singapore. "If there is intervention, they will shy away from the market for the time being. But at the end of the day intervention does not strengthen banking systems or reduce levels of non-performing loans, so the market may just take intervention as a good opportunity to buy," U.S. dollars against the regional currencies.

In the short to medium term, however, few participants foresee any decoupling of Asian markets, most predicting that regional currencies will continue to shadow the yen.

Part of the reason that Southeast Asian currencies trail the yen so closely can be attributed to the extreme illiquidity of the region's markets following the currency turmoil of the last year, say analysts.

"A lot of the speculative interest has (pulled) out of these markets, and domestic corporations can't get the credit to hedge," said Marshall Gittler, head of currency strategy for Asia at Bank of America in Hong Kong.

The big speculative players, like the large macroeconomic hedge funds, have largely pulled out of Southeast Asia's foreign exchange markets.

At the same time, domestic corporations are finding that currency depreciation has eroded their credit quality to the point where they are no longer able to obtain the credit lines to allow them to hedge their foreign currency debt exposure.

With the level of customer participation in the regional markets so dramatically reduced, argues Gittler, it is not surprising that Southeast Asian currencies show little direction of their own, as interbank traders merely take their cue from the daily swings in the yen's exchange rate.

Nevertheless, some regional currencies do show they have the potential to break free of the yen's influence. The rupiah especially, despite high risks of political instability and minimal liquidity, is thought likely to outperform others over the coming months.

Asian trading on Wednesday saw the rupiah rally strongly after Coordinating Minister for Economy, Finance and Industry Ginandjar Kartasasmita strongly denied reports that Indonesia had defaulted on sovereign debt obligations.

The reports triggered a steep rupiah sell-off in European trading hours on Tuesday, which propelled the U.S. dollar to an overnight high of 13,550 rupiah.

The U.S. currency fell back, however, after Ginandjar denied any default, asserting that Indonesia had suspended some principal repayments as part of its debt rescheduling process agreed with creditors.

Late in Asian trading yesterday, the U.S. dollar was quoted at 12,850 rupiah, off its overnight high and little different from 12,825 rupiah late Tuesday immediately before the default story broke.

Other regional currencies finished Asian trading comfortably higher. Against the Singapore dollar, the U.S. currency fell to test buying support around S$1.7450, ending Asian hours at S$1.7454, down from S$1.7595 late the previous day.

Against the Malaysian currency, the U.S. dollar dropped to 4.1950 ringgit, well below 4.2544 ringgit late on Tuesday. And against the baht, the U.S. currency fell to end Asian trading at 41.8350 baht, down from 42.1550 the day before.

On the Philippine Dealing System, the U.S. dollar ended Wednesday's session at 43.15 pesos, down from 43.610 pesos at the previous close.

In North Asia the U.S. currency dropped against both the won and the new Taiwan dollar, in line with its fall against the yen. At the close of domestic trading in Seoul, the U.S. dollar was at 1,331 won, down from 1,339 won the day before.

Against the Taiwanese currency, the U.S. dollar ended at NT$34.794, compared with NT$34.810 at Tuesday's close.