Forex Flash: Asian central banks active in smoothing strength – ANZ (Barcelona) - Asian central banks have been active in smoothing currency strength. Such activity should not be seen as an attempt to prevent appreciation – central banks know they can’t. In our view, policymakers are more concerned about the speed (or volatility) of currency moves, rather than any particular level of the currency itself. According to Senior FX Strategist Khoon Goh at ANZ, “Past experience has also shown that it is not the surge in capital inflows, pushing currencies higher, that causes problems. In fact, it is the opposite – when large capital outflows occur swiftly, this may cause large currency depreciation.”

“While there is no doubt that capital inflows are playing a part in Asian currency appreciation, we see real flows being influential as well, as evidenced by strong and rising current account surpluses in countries such as South Korea, Taiwan and the Philippines, and the improvement seen in China’s trade surplus.” Goh adds.

In any case, “we believe foreign investors in the region will not be as flighty compared to the past. Governance and economic performance has improved in many countries in Emerging Asia, FX reserves have been built up as an insurance buffer and, while some administrative measures may have been undertaken by policymakers, there is no threat of capital controls being put in place.” he reiterates.

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