[ForexNews]

Asian currencies have appreciated in conjunction with the cyclical rally and equity
market performance to some degree or other. This is even true of the HKD which has been pushed back to the bottom of its band as the equity market rallied.

The Korean Won has appreciated by 19% since March 9th, a performance
outstripping the rest of Asia. While a more favourable appetite for risk has underpinned this move, the improvement in Korean data has provided an important fundamental back drop. After a staggering 18%qoqann contraction in activity in Q4 of last year, the Korean economy managed to post a small expansion in Q1 of this year. Leading indicators look favourably on the outlook for activity going forward. As well flagged by Goohoon Kwon, the Korean external back drop has improved sharply including strong foreign buying of Korean equity in March. How much further the KRW can appreciate from here will depend on the Korean authority’s tolerance of further strength and also risk sentiment. A deterioration in risk appetite is likely to see the KRW weakening sharply and a similar reaction is likely to be seen elsewhere in Asia.

The Kiwi has also managed to fly high, however some are more dubious that this strength is warranted by the fundamentals. Some of the macro data has printed marginally better than expectations, however we remain at bottom of consensus expectations for New Zealand growth largely due to the very slow feed through of monetary easing into the NZ economy. On the RBNZ’s last estimation, the easing so far is projected to take around 12 months to filter into the economy, far slower than the easing in Australia which in the main has been passed on rapidly. New Zealand’s external backdrop also gives grounds for caution. In Q4 of last year, the New Zealand BBoP deteriorated to 13% of GDP due to large foreign selling of NZ debt. While New Zealand’s trade balance has moved into surplus, the country’s net income payments abroad remain a large drag on the external balance and this leaves the Kiwi vulnerable to a reversal.

The Indonesian Rupiah has been the fourth best performing currency with an appreciation of 13% against the Dollar. The performance of the currency is tied to risk. The severe weakness of the IDR was linked to fears that Indonesia would be the worst hit country in the region as it was in the Asian crisis. Thus far the data has revealed that assumption to be incorrect. In fact Indonesia has printed rather better GDP numbers compared to the rest of Asia for Q4 of last year. The authorities have intervened heavily to smooth the appreciation and it will be interesting to see how far they let it run. Given that Bank Indonesia have previously been happy with $/IDR between 9000-9500 and that inflation expectations have ticked up a bit in March, in this risk on environment the cross could conceivably go back to its old levels.

Even the pegged currencies in the region have not escaped the influence of the stock market rally. The HKD had moved off the strong end of its band in conjunction with equity market weakness, but as the equity markets rallied $/HKD move back 7.75. With the better Chinese data and increasing global optimism there is more interest in positioning for a stronger CNY. Indeed the NDFs are now pricing in about a 1.5% appreciation in 12 months time. Base case is that the Chinese authorities will keep the currency stable vs the Dollar as has been the case since last July. The risk lies towards a stronger CNY in 12 months on the back of stronger growth and still positive current account surplus.