Forex Investment and Currency Trading

Asian ex-Japan (AXJ) currencies, especially ASEAN currencies have performed well overall in the last few years bolstered by increased calls for Asian adjustment to help reduce global imbalances, broad USD weakness and higher policymaker comfort with local currency appreciation. There are near-term risks however stemming from the waves of bad news from the credit markets. This has been leading to some paring back of risks across the board. Therefore, Asian currencies and assets markets have been caught up in this. Long term, greater inter-regional trade, large current account surpluses and stronger domestic demand in specific cases will provide some support to these currencies once the dust settles. There is also a direct impact of the U.S. housing market woes. Despite much debate about how much more resilient Asia is to U.S. slowdowns it is still by no means immune. Therefore a greater than expected U.S. slowdown could causes significant corrections in the currencies of those AXJ countries that are particularly sensitive to changes in U.S. import demand.

Separate to the U.S. risks, which may be most felt in H2-08, AXJ currencies are expected to rally in 2009 and beyond, helped by renewed broad USD weakness, better valuations and supportive monetary and fiscal policies, which in turn should attract renewed capital inflows.

EM currencies lagged behind the move in the USD in the 1980s and 1990s, and are showing a similar pattern now. If this holds, then we should see AXJ currencies continue to outperform into 2010 after the major currencies have peaked.