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Asia’s central banks rebuild foreign exchange reserves as Fed bets grow

INDIA is leading a charge among Asia’s emerging-market (EM) central banks in rebuilding foreign-exchange (FX) stockpiles, which would help them defend their currencies if the dollar rebounds.

India, South Korea, Taiwan, and Southeast Asian countries have recouped about $132 billion since November — more than half of what they lost last year — by soaking up dollar inflows, with a weaker greenback also boosting their portfolio valuations, according to Bloomberg calculations based on foreign-exchange data. The rupee has lagged behind EM peers partly because its central bank has been the most aggressive in rebuilding reserves.

These countries saw their foreign reserves drop by $243 billion in the first 10 months of 2022 as they sought to defend currencies that plunged against the dollar. Rebuilding their stockpiles may help Asia’s emerging markets withstand any potential rebound in the greenback, as some traders start pricing in higher US peak rates, which would hit demand for risk assets.

“If an investor asset reallocation back into EM/Asia continues to materialize, owing to the significant foreign portfolio outflows and underweight positioning throughout most of last year, we believe Asia ex-Japan central banks will broadly accumulate reserves in the coming months,” Nomura Holdings, Inc. strategists including Craig Chan wrote in a Feb. 9 note.

Goldman Sachs Group, Inc. has an underperformer rating on the rupee, partly due to the Reserve Bank of India’s actions, while Nomura is advising clients to short the rupee against the Indonesian rupiah.

Deutsche Bank AG has tactically shifted to a “hold” or “reduce” bias on a majority of their long Asia currency recommendations, from an earlier “add” bias, but remains positive on Asian currencies from a medium-term perspective.

Since losing $100 billion largely by propping up the rupee last year, the RBI has taken every opportunity to mop up dollars, boosting reserves by almost $50 billion in the past three months. South Korea has added $26 billion in the same period after earlier losing $49 billion, and Indonesia has recouped $9 billion of the $15 billion it lost, according to Bloomberg calculations.

Not all central banks have been equally aggressive. Bank Indonesia chose to sit on the sidelines in January, despite seeing sizable portfolio inflows. Contrast that with India, which bought an estimated net $10.1 billion in the spot foreign-exchange market, while South Korea bought $4.2 billion in the same month, according to Nomura calculations. Thailand bought $5.3 billion across its spot and forward markets, it estimated.

Most emerging Asian currencies have surged in the past three months, led by the Thai baht and Philippine peso, with the former gaining almost 5% as the dollar weakened on bets that the Federal Reserve will pivot on interest rates. Recent data have cast doubts on those expectations. Federal Reserve officials stressed the need for further interest-rate increases to help tame inflation after US data again beat economists’ estimates on Tuesday.

Overseas investors bought $8.6 billion of assets in emerging Asia markets excluding China last month, according to estimates by Australia & New Zealand Banking Group Ltd. The bank expects inflows into the region to continue, though risks to that view include inflation not receding in the US as expected and potential delays in negotiations over the US debt ceiling, Khoon Goh, head of Asia research, wrote in a note.

“We think that the threshold of FX gains for intervention have already been met,” said Mallika Sachdeva, head of Asia macro strategy at Deutsche Bank. “It would be fair to expect Asian central banks to start intervening. We find episodes of Asian central bank intervention tended to significantly slow FX moves, but did not succeed in engineering reversals.” — Bloomberg

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