Standard Chartered Plc recommends that clients purchase Asian currencies on speculation central banks in the region favor appreciation to stem inflation.
"Investors should buy a basket of high-inflation Asia excluding Japan currencies including the Singapore dollar, Malaysian ringgit, China yuan and Taiwan dollar," the bank's global team of foreign-exchange strategists led by Callum Henderson wrote in a monthly report for December. "Price pressures are growing across the region."
Malaysia and China have managed their exchange rates against a basket of currencies since their pegs to the dollar were scrapped in 2005. The respective central banks sell ringgit and yuan to temper gains, adding money to the banking system and making it hard to control inflation. Singapore uses its currency rather than interest rates to counter price pressures.
The Singapore dollar has advanced 2.8 percent this quarter to S$1.4451 at 12pm local time yesterday, and the Malaysian ringgit gained 2.2 percent to 3.3315, according to data that was compiled by Bloomberg. The yuan edged up 1.4 percent to 7.4012 and the New Taiwan dollar rose 1.1 percent to NT$32.313.
Standard Chartered forecasts the Singapore dollar will appreciate to S$1.4 by the end of next year, the ringgit to 3.27, the yuan to 6.84 and the New Taiwan dollar to NT$32, according to David Mann, senior strategist at Standard Chartered in Hong Kong.
With credit-market losses in the US threatening to slow economic growth in Asia's biggest export destination, regional central banks may choose currency gains rather than raising borrowing costs, the report said.
"If they are worried about inflation, one way of directly helping to deal with imported inflation is to have a stronger currency," Mann said. Currency sales "can add to the inflation pressure and one way of dealing with it is to allow the currency to go stronger so they won't need as much intervention."
Singapore's inflation rate accelerated in October to the highest level since 1991, while China's prices rose the fastest in a decade. In Malaysia, the pace of price increases was the fastest since February, while Taiwan's inflation reached a 13-year high even as the currency strengthened for three months through November.
The Monetary Authority of Singapore on Oct. 10 extended a three-year policy of seeking a stronger currency to curb inflation and signaled it will allow "slightly" faster gains, helping to send the currency to a decade-high last month.
Singapore's dollar is managed within an undisclosed band based on a basket of currencies of its trading partners. The ringgit is also controlled within a basket. The yuan is allowed to move by up to 0.5 percent either side of a so-called central parity rate set each day, with the exchange-rate basket including the South Korean won, the euro and the Hong Kong Dollar.
"It will not have escaped their attention that foreign-exchange intervention is partly responsible for their inflation problem," the Standard Chartered report said. "Although there is no official evidence, we suspect Taiwan has been intervening in the market," Mann said.
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