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China woes add to Asia FX perfect storm; Korea tensions hit won

Friday, August 21, 2015 - 14:57
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Emerging Asian currencies fell on Friday, ensuring another losing week, following the worst Chinese factory activity survey in 6-1/2 years and a slide in South Korea's won on growing geopolitical tensions in the peninsula.

[SINGAPORE] Emerging Asian currencies fell on Friday, ensuring another losing week, following the worst Chinese factory activity survey in 6-1/2 years and a slide in South Korea's won on growing geopolitical tensions in the peninsula.

The Malaysian ringgit hit a fresh pre-peg 17-year low as investors awaited foreign exchange reserves data amid concerns about how much ammunition the central bank has to defend the embattled currency.

Activity in China's factory sector in August shrank at its fastest pace since March 2009 on dwindling domestic and export demand, a private survey showed earlier. That accelerated losses in regional currencies and stocks. Most Asian government bond prices also slid.

A sluggish China economy raised the prospects for slower inflation, weaker demand for commodities and a currency war after Beijing's currency devaluation last week.

"The perfect storm that has enveloped EM local markets looks set to continue," analysts for Barclays said in a note.

"The implications for growth spill-overs, competitiveness and disinflation are likely to be more keenly felt in EM than DM," they said, referring to emerging and developed markets.

Emerging Asian currencies were already on course for weekly losses as China's stocks kept losing ground, underscoring concerns that unstable financial markets may hit the world's second-largest economy and global growth further.

Regional currencies ignored the dollar's broad weakness stemming from waning expectations of an US interest rate hike in September. The dollar fell to its lowest level in nearly eight weeks versus a basket of six major currencies.

The won fell 1.8 per cent against the dollar this week, as offshore funds sold the South Korean currency with local shares touching a two-year low.

North Korean leader Kim Jong Un ordered his troops onto a war footing from 5 pm (0830 GMT) on Friday after Pyongyang issued an ultimatum to Seoul to halt anti-North propaganda broadcasts by Saturday afternoon or face military action.

Foreign investors were net sellers in the main stock market for a 12th consecutive session. They unloaded a combined net nearly 2 trillion won (US$1.7 billion) worth of equities during the period, according to Korea Exchange data.

"North Korea issues added to blows to all South Korean financial markets," said Jeong My-young, Samsung Futures research head in Seoul.

"Still, China is a much more important factor. Without stabilisation signs in Chinese markets, it is unlikely to see any bargain-hunting inflows." The ringgit lost as much as 1.1 per cent to 4.1830 per dollar, its weakest since Aug. 31, 1998, leading regional declines this week with 2.6 per cent depreciation.

Malaysia will release reserves data as of mid-August at 1000 GMT. As of July 31, international reserves were down to US$96.7 billion, compared with US$100.5 billion on July 15.

The fresh reserve number "should be flat or slightly lower,"said Andy Ji, Asian currency strategist for Commonwealth Bank of Australia in Singapore.

Ji still sees a possibility of capital controls even though Prime Minister Najib Razak and central bank governor Zeti Akhtar Aziz said the country would not impose any.

"Given declining reserves, rising outflows and onshore USD demand for safety and inflation hedge, the reserves are not going to be adequate" to support the ringgit, said Ji, adding intervention would work only with some variation of capital controls.

A protracted political crisis, slumping commodity prices and an investor exodus from emerging market assets have all undermined the currency's appeal, and pressure intensified after China's surprise yuan devaluation last week.

Other emerging Asian currencies were on the course of weekly losses.

Thailand's baht has lost 1.2 per cent so far this week as a bomb blast at a popular Bangkok shrine on Monday raised worries about tourism, the only bright spot in the economy. The Indonesian rupee has slid 1.1 per cent this week on falling commodity prices.

The Taiwan dollar has fallen 1.1 per cent throughout the week as the island's export orders contracted for a fourth-month in July due to weak Chinese demand.

India's rupee has dropped 1.3 per cent. The Philippine peso ended the week down 0.6 per cent with local financial markets closed for a holiday on Friday.

REUTERS

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