Pedestrians walk past stores at a wholesale market in the Old Delhi area of Delhi. (Photographer: Anindito Mukherjee/Bloomberg)

Yellen's Asia Peers Hoard Currencies as Fed Countdown Continues

(Bloomberg) -- Across much of Asia, foreign currency reserves have never been stronger.

India’s are set to hit a new high of $400 billion, enough to cover a year of imports, while holdings of international currencies in South Korea, Taiwan, Thailand and Indonesia are all at record levels. China’s reserves -- the world’s biggest -- posted a seventh straight gain in August to $3.09 trillion, helping to reverse a near $1 trillion decline.

Steady capital inflows from yield hungry investors and the weaker dollar have swollen coffers, positioning Asia’s central banks to tackle any volatility triggered by the Federal Reserve’s plan to shrink its balance sheet -- details of which are expected to be announced on Sept. 20. Indeed, central banks in India and Indonesia have been so confident in their inoculation from the Fed’s tightening that they both cut interest rates last month.

"It is a deliberate strategy to buttress defenses as the Fed looks set to withdraw liquidity, raising risks for capital flows into emerging markets," said Frederic Neumann, co-head of Asian economic research at HSBC Holdings Plc in Hong Kong. "Caution reigns."

Asia’s central banks have good reason to be on their toes. A signal by then Chairman Ben Bernanke in 2013 of a curb to his huge bond buying program threatened to suck capital away from the region and piled downward pressure on currencies. The Reserve Bank of India was among the hardest hit in the ‘taper tantrum’ as speculators dumped the rupee.

India Inflows

Conditions have since improved. Yield-hungry investors are chasing India’s high local real rates, stable rupee and the promise of more economic reforms. 

Foreigners have poured more than $20 billion into Indian debt and $6.5 billion into stocks so far this year, helping the rupee rise more than 6 percent against the dollar. India received $60 billion in FDI in the year to March 2017, making it one the largest recipients of inflows.

And it’s a similar story for much of the region, where the combination of robust economic growth and generous yields are luring investors even after four Fed rate increases.

"Asia still offers high rates of returns while among the G-3 central banks, inflation is yet to take off," said Radhika Rao, economist at DBS Bank in Singapore.

Indonesia -- where memories of the Asia financial crisis still linger -- has built its foreign reserves to almost $129 billion. As of the end of August, the country had reserves equivalent to 8.6 months of imports and government external debt repayments.

Thailand’s reserves have climbed to a record $196 billion as inflows surged. Indeed, the nation’s external position is so strong it’s becoming a headache for policy makers.

South Korea’s rose to a record $384.8 billion at the end of August. That’s one reason the country’s policy makers remain confident of the economy’s resilience despite risks posed by the Fed and tensions with North Korea.

Japan’s reserves have remained stable at around $1.2 trillion since intervening in 2011 to stem the yen’s appreciation. Unlike other parts of Asia, Japan’s decades of economic stagnation has eroded the yields offered by the nation’s securities.

China’s reserves appear to be on an upward trajectory again, helped in part by the weaker dollar and the yuan’s surprising strength this year. But there are signs that officials feel the currency’s gains have gone far enough.

One reason money is flowing into Asia is evidence of decoupling between central banks in the region and the Fed.

"In previous U.S. tightening cycles, monetary policies in Asia had been largely in sync with the Federal Reserve’s," said Sian Fenner, lead Asia economist at Oxford Economics in Singapore. "But not this time."

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