Asian Currencies Are A Risky Bet Says Goldman Sachs (GS)

Bloomberg reports that according to Goldman Sachs Group Inc. (NYSE: GS), buying Asian currencies is a “more risky” investment after many of the Asian currencies strengthened above or close to the levels witnessed before the financial crisis. Michael Buchanan, chief Asia-Pacific economist at Goldman Sachs in Hong Kong, wrote in a note yesterday that Indonesia’s Rupiah and Malaysia’s Ringit have appreciated past pre-2008 crisis levels on an inflation-adjusted, trade-weighted basis by 2% and 1%, respectively. Meanwhile, South Korea’s won is 21% below its pre-crisis level, the Thai baht 11%, the Taiwan dollar 8% and the Chinese yuan 7%.

According to the data compiled by Bloomberg, investors who would have borrowed U.S dollars to buy rupiah would have made a return of 27% in the past year, while a similar won trade would have earned 20%. This week the Monetary Authority of Singapore took a decision to revalue its currency and plans to seek more gains to curb inflation. There is also speculation that China may end its 21 month old yuan peg. “It is no longer about how quickly currencies appreciate back towards pre-crisis levels, rather it is about appreciating beyond the pre-crisis starting point,” commented Buchanan in his notes. “The trades are now more risky than before and perhaps more reliant on a move from China to maintain the momentum,” added Buchanan.

The note said that rising trade surpluses, mounting inflation, portfolio inflows along with the asset price bubbles may prompt central banks in the region to seek appreciation of their currencies beyond the pre-crisis levels. The note further said, “Monitoring each currency’s trade-weighted index is crucial to determining central banks’ appetite for further gains.”

In recent months, policy makers in Australia, India, Malaysia and Vietnam have raised interest rates. China also has increased its bank reserves requirements twice as the economy grew in the first-quarter at its fastest pace in last three years. In order to curb inflation, China would allow its currency to appreciate by June 30, while avoiding a onetime jump in value that might endanger export jobs, a Bloomberg survey of analysts showed. “The yuan proxy trade effect is important but will be modest from here, Our view on the yuan is a near-term move in the regime but no significant up-front appreciation,” the note says. The note from Buchanan concludes that the won, rupee, peso, ringgit and the Singapore dollar would continue to appreciate.