Most Asian currencies have posted solid spot returns against the USD this year
The Korean Won is the leading Asian currency on the year, as domestic growth holds up and the Bank of Korea raising rates for the first time in 6 years. Even though it was a "dovish hike", it signals that the central bank is looking to tighten monetary policy - following a similar pattern as developed economies in Europe and North America.
The top four currencies in Asia have somewhat of a similar pattern. The MYR, THB, and TWD all posted solid gains on the year - and their central banks are expected to kick off their respective tightening cycles as well. After Korea, Malaysia's central bank is expected to move in 1H 2018. Meanwhile, Thailand and Taiwan's central banks are expected to raise rates either by the end of next year or in early 2019. But if global growth remains upbeat, we could see those timelines be pushed forward.
The biggest potential headwind for Asian markets (emerging Asia in particular) will be further Fed rate hikes. Despite three hikes in 2017, US 10-year yields have failed to receive a boost as it closes the year near where it ended in 2016 (2.44%).
But if more rate hikes come into the picture and lift US yields higher, we could see Asian currencies start to lag as portfolio rebalancing starts to come into play. However, looking at things this could take quite a while before that happens. And that's likely to keep the emerging market party going on for quite some time.
The other potential headwind is that the relative strength of Asian currencies may put a dent on export competitiveness. That's something that may come back to bite countries like South Korea and China.
But looking at the bigger picture, it's really until yields in the US start climbing will we see the emerging market party come to a halt. Otherwise, stocks and bonds in emerging Asia are too attractive for fund managers and investors to pass up.
