FX COLUMN-Asian currencies to bask in G20 bonhomie

— Krishna Kumar is a Reuters FX analyst. The views
expressed are his own —

By Krishna Kumar

SYDNEY, Oct 24 (BestGrowthStock) – The G20 meeting of finance
chiefs was definitely what the doctor ordered to relieve
concerns that the so-called currency war was spiralling out of
control.

All the participants have left with a sense of
satisfaction, perhaps surprising even the most hardened
sceptics. Risky assets should benefit, and look to play gains
in Asian currencies against the dollar at first and then the
euro later on.

The meeting has conjured up some concrete measures: reforms
in the IMF, stronger language emphasising “market determined”
exchange rates and vows against competitive devaluations all
while laying the groundwork for more concrete targets on
current account balances at the final G20 summit.
[ID:nTOE69K01G]

The breakthrough on the vexed question of power sharing in
the IMF is very significant. [ID:nTOE69M01A]

The developing nations will definitely realise that
enhanced power goes hand in hand with added responsibility,
resulting in them sharing in the burden of resolving global
economic problems instead of indulging in unilateral action.

The landmark agreement will, to a large extent, serve to
restore the faltering credibility and legitimacy of the IMF, as
pointed out by Indian Finance Minister Pranab Mukherjee.

IMF chief Dominique Strauss-Kahn went a step further by
calling the agreement the biggest governance reform ever for
the institution.

Critics may point to the lack of an agreement on numerical
targets for current account balances, as proposed by the United
States. They may justifiably point to the sharp words from
German and Chinese officials aimed at U.S. policy and the
prospect of more quantitative easing. [ID:nLDE69M02P]

Those critics have to realise, though, that the lead-up to
the meeting had all the hallmarks of it degenerating into a
school yard fight between wealthy nations and emerging powers.

Considering that the G20 meeting culminated in a lot of
handshakes and backslapping, the final outcome has exceeded all
expectations.

The initial reaction in the financial markets will be one
of relief and will result in risk-on trades. Though this will
benefit currencies such as the euro (EUR=: ) and the Australian
dollar (AUD=D4: ), the difference this time will be the
outperformance of the EM currencies — especially Asian
currencies.

The reference to market determined rates and vow to refrain
from competitive devaluations is a strong hint that the Asian
central banks will drastically cut down on their interventions
against rising currencies.

As long as the exchange rates are fundamentally justified
and the rate of appreciation is not too rapid, the Asian
central banks will desist from constant intervention in the
markets.

The South Korean won (KRW=KFTC: ), which is arguably one of
the most undervalued of the Asian currency pairs, may stand to
benefit the most and a test to, and a possible break of, the
major 1.102 low versus the dollar this year. Immediate
resistance is at 1,140 and major resistance is at 1,155.

To guard against the uncertainty surrounding the size of
the quantitative easing expected by the Federal Reserve at its
November meeting, it may be more prudent to consider selling
euro/won (EURKRW=R: ).

Investors can consider selling USD/KRW initially and fade
the euro on an expected rally to the $1.4218/1.4375 resistance
zone — the former is the low from last December and the latter
is the 76.4 percent retracement of November 2009 to June 2010
euro decline.

This strategy removes the risk of a dollar rebound as a
result of the Fed disappointing markets if its second round of
quantitative easing is not so aggressive.

The possibility of Fed watering down QE2 is something to
guard against now. A few countries have already made clear
their displeasure with what they view as lax U.S. economic
policies undermining the dollar.

The G20 communique made an oblique reference to the United
States by saying that advanced countries — including those
with reserve currencies — should be vigilant against excessive
volatility and disorderly exchange rate movements.

The United States may not want to jeopardise the nascent
mood of bonhomie in the G20.

(Editing by Eric Burroughs) (([email protected];
+61 2 9373 1803; Reuters Messaging:
[email protected];))

FX COLUMN-Asian currencies to bask in G20 bonhomie