Volatility hurting global currencies

Economic performance will determine strength

PETALING JAYA: The volatility of the global equity and financial markets in the past months has make it hard to predict what currencies to invest in.

This is especially as governments worldwide cut key interest rates to boost their economies and their currencies are, in turn, affected by the loose monetary policies.

“For 2009, the determinant for currency strength will be economic performance,” AmBank Group FX and interbank senior manager Yee Ming Shen told StarBiz.

He said any economy that recovered first should be targeted.

“It is not easy to predict which currencies are going to be the ones to look out for at this point because the economic slump and financial crisis are far from over,” Yee added.

He said currencies were being used as “tools” to manage the economy and “it is close to impossible to know where they’re headed at this time”.

“It will be a tough year for currencies whose strength is based on commodities while the Japanese will prefer their currency to be weak to boost exports,” Yee said, adding that this might fuel more speculation on the yen carry-trade.

A currency exchange worker holds a handful of euro notes. - AFP

The yen carry-trade is the strategy of borrowing money in yen due to its low interest rates and then converting it into another currency. Japan’s historically-low interest rate was recently cut to nearly zero again after its economy slipped into recession.

According to Bloomberg, quoting an economist with Moody’s Economy.com, the won and rupee would be Asia’s biggest gainers from improved appetite for emerging market assets and a recovery in global economy.

The won and rupee have plunged over 30% and 19% respectively against the US dollar while foreign funds have sold US$37bil worth of South Korean stocks and more than US$13bil of Indian equities.

The economist said India had a strong domestic market with strong growth potential and was one of the most attractive destinations for foreign direct investments.

Meanwhile, Citigroup Inc vice-president for Asia-Pacific economics and market analysis, Kit Wei Zheng, said the global economy was going through a sustained downturn and this had affected local exports.

On Malaysia, he said that from a purely fundamental perspective and ignoring any interest rate cut angle, the current market situation did not really favour a strong ringgit. “In the kind of environment where growth is very weak, I don’t think Bank Negara will allow it to happen.”

Furthermore, the ringgit traded broadly in line with the Singapore dollar and, at this point, the Monetary Authority of Singapore would prefer a weaker dollar, AmBank Group FX’s Yee said.

“The ringgit outlook depends on how the Singapore dollar is faring since both currencies trade within a narrow range and Singapore is Malaysia’s second-largest trade partner,” Yee added.

The Star- Fintan Ng