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Free AccessMNI 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$FX$]
To read the full story
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Why MNI
MNI is the leading provider
of intelligence and analysis on the Global Fixed Income, Foreign Exchange and Energy markets. We use an innovative combination of real-time analysis, deep fundamental research and journalism to provide unique and actionable insights for traders and investors. Our "All signal, no noise" approach drives an intelligence service that is succinct and timely, which is highly regarded by our time constrained client base.Our Head Office is in London with offices in Chicago, Washington and Beijing, as well as an on the ground presence in other major financial centres across the world.