UBS said that Asian central banks, including in Japan, South Korea and Taiwan, will sell their currencies for the next year to spur exports and maintain economic growth amid a slowdown in China and the US.
Asia's economic gains will "peak by the second half of the year, driven by a coordinated growth deceleration in China, Japan and the US," Jonathan Anderson, a Hong Kong-based chief economist at UBS, wrote in a research note. "We expect central banks to keep up the pace of large-scale" sales.
Relying on currency sales would extend a policy that Japan, Singapore and South Korea used last year to try to lure overseas buyers. For Japan, it would mean resuming sales after a break.
The central bank hasn't sold yen since March 16 as the nation's economy grew, following record sales of ?15.2 trillion (US$136.8 billion) earlier in the year.
Japan is probably the least likely to sell currency "at the pace it's done in the past," said Ashley Davies, a currency strategist at UBS in Singapore, in an interview. "That's simply because the economy is improving. They can tolerate a bit of yen strength. We look for continued strong intervention by Korea. The domestic economy is still relatively weak."
Asian central banks will resort to sales again after US Federal Reserve chairman Alan Greenspan signaled the Fed is ready to raise interest rates, threatening to slow economic growth in the world's biggest consumer of Asian exports, Anderson wrote.
China -- South Korea and Taiwan's biggest export market -- is also trying to slow growth to 7 percent this year from an expansion of 9.8 percent in the first quarter.
Choi Joong Kyung, director-general of the South Korean finance ministry's international finance bureau, said on April 2 that the central bank had conducted a "smoothing operation." The central bank buys or sells the won at the instruction of the ministry.
Central banks may be able to slow gains, though they won't be able to thwart a rally in the currencies, UBS said. It didn't specify which central banks in the region are most likely to sell.
UBS recommended buying the Japanese yen, Singapore dollar and New Taiwan dollar because overseas investors had become net buyers of Asian stocks, wrote Bhanu Baweja, a Singapore-based currency strategist.
"Strong foreigners' selling of Asian equities has now subsided and given way to a modest net buying of Asian stocks," the report said.
UBS said it is sticking with its forecast that the yen will appreciate to 100 per dollar at the end of the year.
Fund managers from outside Asia purchased a net ?186 billion in Japanese shares in the two weeks ending June 2, after being net sellers in the previous two weeks, according to Tokyo Stock Exchange figures. Such investors were also net stock buyers in Taiwan last week after they sold more equities than they bought a week earlier.
UBS cut its forecast for gains in the Indonesian rupiah this year on concern the country's presidential election on July 5 will deter some investors.
The rupiah may trade at 8,800 against the dollar at the end of the year, versus a previous projection of 8,200, from today's 9,388, UBS said.
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