MNI ANALYSIS: Reserve Build-Up No Support For Asian FX

--Asia Portfolio Outflows Likely To Drive Weakness

By Stuart Allsopp

     SINGAPORE (MNI) - While Asian central banks continue to accumulate reserves

in an attempt to prevent currency appreciation, MNI do not see this as a reason

to be bullish on Asian FX, given the potential for portfolio outflows to reverse

amid rising U.S. interest rates.

     Central bank reserve holdings across Asia continue to rise, with April

seeing new record reserve levels in countries including South Korea and

Thailand. The accumulation of reserves reflects the efforts on behalf of

regional central banks to keep their currencies weaker than they otherwise would

be, which, in isolation implies that there could be further upside for Asian FX.

     However, new highs in reserves have not prevented currency weakness in the

past and MNI do not expect them to do so this time around, for three main

reasons.

     --NOMINAL RESERVES AT HIGHS

     Firstly, although reserves have risen to new all-time highs in nominal

terms in many cases, when looked at relative to imports and GDP they have pretty

much gone nowhere since the global financial crisis.

     Secondly, the amount of portfolio liabilities that Asian economies have

accumulated over recent years has outstripped the reserve increase, meaning that

there is significant potential for foreign investors to pull funds out of equity

and bond markets as real return prospects in the U.S. continue to improve amid

higher real interest rates.

     Thirdly, central banks do not tend to act to prevent weakness until it is

deemed excessive, so although any portfolio outflows can be countered by reserve

sales, in practice central banks are highly unlikely to do so.

     That said, the improvement in external balance sheets across Asia -- in

particular in Korea, Thailand and India -- should enable these countries to

outperform relative to other emerging and developed markets excluding the USD.

Over time, the positive net international investment positions will result in

improved income account inflows, which will put gradual appreciatory pressure on

regional currencies.

--MNI Singapore Bureau; +65 8233 2326; email: Asia-Editor@marketnews.com

[TOPICS: M$A$$$]