Asia’s currencies are flashing oil shock alarm

By Ankur Banerjee and Jaspreet Kalra

SINGAPORE, May 21 (Reuters) – Asia’s policymakers are taking increasingly urgent and unusual steps to shore up their economies on the front line of the global energy supply shock, with currencies falling to record lows and pressure already forcing up interest rates.

Asia buys about ​80% of oil shipped through the shuttered Strait of Hormuz and stress in foreign exchange markets is one of the clearest signs that rising fuel prices are starting to hurt growth.

Governments are in an unenviable position. The path to preserving growth is precarious because falling currencies can shake confidence and stoke inflation, but supporting them with higher rates means a hit for consumers and the economy’s growth engine on top of the fuel shock.

India has appealed to citizens to drop overseas trips and avoid gold purchases to protect a rupee that is among the world’s biggest losers since war in the Middle East reduced crude supplies.

Prime Minister Narendra Modi has shrunk his own motorcade to save fuel, a government source told Reuters, while bankers think the central bank is spending $1 billion a day to prop up the ailing currency, which is trading at record lows.

The government source and the four banking sources requested anonymity as they were not authorised to speak publicly.

Indonesia on Wednesday announced a surprise 50-basis-point rate hike to shore up the rupiah – which also trades at record lows against the dollar – and seized control of commodity exports to ensure proceeds stay onshore and in the local currency.

The Philippines’ central bank has already raised rates, and there is talk that surging inflation could prompt an out-of-cycle hike before the next meeting due in a month’s time.

“How many hikes does it really take to incentivise capital to come in? The answer could be quite a lot,” said Navin Saigal, head of global fixed income for Asia Pacific at BlackRock.

“On the flip side, what do those hikes end up doing to the domestic economy? And the answer is, it could be quite a lot.”

India, Indonesia and the Philippines are particularly vulnerable because they are oil importers that are also being hit by capital outflows as investors take their cash elsewhere.

A sudden shift in U.S. interest rate expectations – with a hike seen as a risk this year – has piled on more pressure, pushing the rupiah to 17,700 per dollar, the rupee to the verge of 97 per dollar and the peso to nearly 62 to the dollar.

MARKETS APPLY THE BLOWTORCH

The growing unease over money flows is turning the environment in financial markets hostile.

For Indonesia, the currency has tumbled 12% against the dollar under President Prabowo Subianto who has pursued an interventionist agenda that has been unpopular with investors – draining foreign exchange reserves to their lowest in two years.

The rupiah was sliding again barely a day after Indonesia lifted rates and stocks have slumped as the move to centralise exports deepened investor concerns that have already put Indonesia at risk of a credit-rating downgrade.

“That is not something that is going to encourage people to invest. It is like a state interventionist approach,” said Charlie Robertson, global chief economist and head of macro-strategy at FIM Partners in London.

“Does this look like a government that knows better than the market? What has happened over the last six months suggests no. There is too much heading in the wrong direction,” Robertson said.

S&P Global Ratings warned Indonesia’s plan to centrally control commodity shipments could hurt exports, squeeze government revenue and weaken the balance of payments.

In India, the central bank’s use of the forward dollar market has also come under scrutiny with short forward dollar commitments surpassing $100 billion, eroding the comfort offered by the overall $700 billion reserve kitty.

“Once reserves become a market focus, the optics matter,” said Vivek Rajpal, Asia macro strategist at JB Drax Honore.

“The room to lean aggressively against further pressure looks increasingly limited. Both BSP and BI are now already on a hiking path, with India likely to follow.”

India is considering all available options to stabilise the rupee, including an interest rate hike, Bloomberg News reported on Thursday, citing people familiar with the matter.

India, Indonesia and the Philippines still have room to raise interest rates and the capacity to at least use reserves to keep currency moves from getting out of control.

But the pressure is unrelenting, with several investment banks recommending clients to sell Asia’s struggling currencies against its stronger ones.

“Given that no one can predict the Iran-U.S. situation, we prefer relative value trades,” said Chandresh Jain, emerging market Asia rates and FX strategist at BNP Paribas, suggesting bets on the Singapore dollar, Malaysian ringgit, Chinese yuan or South Korean won against the Thai baht, rupee or rupiah.

(Reporting by Ankur Banerjee and Rae Wee in Singapore, Jaspreet Kalra in Mumbai, Marc Jones in London and Rodrigo Campos in New York; Editing by Jacqueline Wong)