Typically regarded as the more vulnerable currencies in Asia to external shocks, the ringgit, baht, and rupiah are proving the most resilient on their relatively lower exposure to China and a dovish Federal Reserve.
The Malaysian, Thai and Indonesian exchange rates are the top three performers among Asia’s emerging markets over three months. That’s a reversal of fortune from 2013’s taper tantrum when they trailed their northern counterparts as the U.S. central bank indicated it would wind down unprecedented stimulus.
“The market has moved away from being wary of Fed tightening to pricing in a Fed relent and that’s benefiting countries with higher-yielding assets like Indonesia for now," said Mallika Sachdeva, a foreign-exchange strategist at Deutsche Bank AG in Singapore. “North Asian currencies are being treated as proxies for China currency stress.” The German lender favors the rupiah and the ringgit over the South Korean won and Taiwan dollar, she said.
Slowing inflation and faster growth in Indonesia are luring foreign funds to the country, while Malaysia’s government managed to keep its budget deficit within target and exports have held up even as oil prices slumped. A lot of negatives had already been priced into these exchange rates because of the plunge in commodity prices in 2015, said Nizam Idris, head of strategy for fixed income and currencies at Macquarie Bank Ltd. in Singapore.
“If the dollar strengthens again and that is our base case going forward, then Southeast Asian currencies can also weaken but with a lower beta than North Asian currencies," he said. The recent stabilization in commodity prices has helped the ringgit and rupiah, but not enough to go long on them against the greenback, Nizam said, adding that he’s most bullish on the rupiah.
The ringgit rose 4.9 percent over three months, while the baht and the rupiah climbed 1 percent and 0.9 percent, respectively. All other Asian emerging-market currencies have dropped, led by a 4.2 percent decline in the won.
The resilience of Southeast Asian exchange rates is buoying demand for the nations’ local-currency sovereign debt, and Fed Chair Janet Yellen’s remarks to to Congress that U.S. interest-rate increases may be delayed drove them higher on Thursday. Indonesian notes have returned 5.4 percent over the last three months, the most in Asia, followed by a 5 percent gain in Thai securities, Bloomberg indexes show.
Thailand’s gross domestic product probably increased 2.7 percent last year as the government boosted infrastructure spending, compared with a revised 0.9 percent in 2014, according to the median estimate of economists in a Bloomberg survey before data due Feb. 15. The baht is less vulnerable than the rupiah or ringgit as foreign funds hold a smaller proportion of Thai sovereign notes, Macquarie’s Nizam said.
Indonesia’s economy beat analysts’ estimates to expand 5.04 percent in the fourth quarter and inflation has stayed below 5 percent over the last three months after exceeding 7 percent in the middle of 2015. President Joko Widodo said he was confident growth would reach 7 percent by 2019 in an interview with Bloomberg Television on Thursday. Malaysian exports have risen for seven consecutive months through December.
Indonesia, along with Malaysia and Thailand, is counting on a combination of domestic demand and public spending to shore up their economies. Private consumption makes up 56 percent of Indonesia’s GDP and 51 percent of Malaysia’s, according to figures from Bank of America Merrill Lynch.
North Asia is more reliant on exports and closely tied to China. Around 40 percent of Taiwan’s overseas sales and 31 percent of South Korea’s go to the mainland, data compiled by Bloomberg show. That compares with 18 percent for Malaysia, 15 percent for Thailand and 12 percent for Indonesia.
“In the near term, with external drivers weak across the globe, economies with domestic demand strength will likely continue to outperform,” said Irene Cheung, a foreign-exchange strategist in Singapore at Australia & New Zealand Banking Group Ltd., the most-accurate forecaster in Bloomberg rankings for Asian currencies. “North Asian currencies are more exposed to the global trade recession."