MNI ANALYSIS: Tight Asia FX Correlations To Drive Volatility

By Stuart Allsopp

     SINGAPORE (MNI) - FX correlations across Asia have increased over recent

months with currencies such as the Singapore dollar, Korean Won, Taiwanese

dollar, and the Thai Baht all showing near-record tight rolling correlations

with the Chinese yuan.

     This partly reflects the fact that the Chinese Yuan has been allowed to

float more freely and so naturally moves more in line with the rest of the

region's currencies in response to fluctuations in the U.S. dollar. However,

correlations with CNY NDFs are also the highest they have ever been in many

cases.

     MNI see two reasons for these increased correlations.

     Firstly, they reflect the increasing interconnectedness of central banks'

currency policies across the region, with policymakers increasingly managing

their currencies relative to each other. The PBOC manages the yuan, for

instance, by setting a mid point which is partly driven by the performance of

other regional currencies, while Singapore's MAS and Taiwan's CBC set the SGD

and TWD based partly on the performance of the yuan.

     Secondly, the stronger correlations may reflect the increased importance

that traders are placing on the yuan as the driver of regional FX, given the

increased importance of the Chinese economy.

     --PICK UP IN VOLS

     The implication of these tighter correlations is that volatility is likely

to pick up as strength has the potential to beget further strength and weakness

has the potential to beget further weakness. 

     With implied FX volatility across the region at the lower end of its

long-term range, MNI see potential for a rise over the coming weeks and months.

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

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

[TOPICS: M$A$$$,M$Q$$$,MN$FX$]