2015 will be difficult year for all Asian currencies, but rupee will hold the ground

The year 2015 will be tough for Asian currencies and every single major currency will drift lower against the US dollar. The Indian rupee, however, will be one of the few currencies that will cope with the greenback strength better. That’s the takeaway from the latest report released by HSBC on expected forex trends in the next year.

In the report, analysts write that the broad strength seen in the dollar in 2014, thanks to resurging growth and the expected wind-down of accommodative Federal Reserve policy, will continue into 2015.

They added that while the dollar is broadly expected to strengthen against most Asian currencies - within that, they expect the rupee, Indonesian rupiah and Philippine peso to outperform (or fall less) while South Korean won, Taiwanese dollar and Malaysian ringgit would underperform - those looking for trade should decipher individual pairs of Asian currencies and the euro and Japanese yen, which are also expected to weaken.

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The Chinese renminbi (RMB) will also perform strongly against the dollar but will exhibit strong volatility, they warned.

Also, “other, more domestic-oriented fundamentals could be key to understanding Asian central banks’ FX policies and the direction of global capital flows. These include inflation, competitiveness and reform agendas. This is especially so, if core bond yields stay low,” the report said.

The reason why HSBC expects the rupee, rupiah and peso to outperform is because of “the likelihood of their central banks having FX policies that are not particularly biased towards currency weakness (due to either high inflation or an absence of export competitiveness concerns)”.

“Their domestic demand stories are more compelling than others in the region, reflecting low leverage levels and/or structural reforms. All three have a long-term demographic dividend that will increasingly aid underlying growth. We also see these countries, especially India, benefiting significantly from low oil prices,” the report stated.

While analysts expected the rupee to broadly weaken to 63 to the dollar (that is, fall not too much from current levels), currency traders could play its relative strength by shorting the Canadian dollar (CAD) and buying the rupee.

“The Canadian dollar is seen weakening versus the USD in 2015, while USD-INR should only drift slightly higher. A strong USD environment could continue to weigh on global commodity prices, much to the detriment of the CAD, via slower growth, a wider current account deficit and poorer terms of trade,” the report said.

“However, lower commodity prices would be a net positive for the INR via expected improvements in the trade and fiscal accounts. Both the CAD and the INR have similar current account deficits (roughly 2 percent of GDP), but there is scope for the CAD to deteriorate versus the INR,” it added.