Divergence between EM Asian currencies and EUR likely to widen in Q3, says Scotiabank

The divergence between EM Asian Currencies and the EUR to widen in the third quarter. Market concern over ECB tapering its monetary stimulus will likely weigh on EM Asian currencies that have rallied markedly this year amid large portfolio inflows, while boosting the EUR given faded political risks in the eurozone.

In the meantime, the CNY and SGD will likely outperform other regional currencies as both are managed against a currency basket in which the EUR accounts for a big proportion.

Hawkish comments from the European Central Bank (ECB) and the Bank of England (BoE) could raise concern over global liquidity conditions and weigh on EM Asian currencies afterwards. ECB President Mario Draghi on Tuesday hinted the central bank might start winding down its monetary stimulus due to an accelerating economy, although Reuters reported Wednesday that the comments made by Draghi on Tuesday were misjudged by markets.

Further, BoE Governor Mark Carney said Wednesday that "some removal of monetary stimulus is likely to become necessary if the trade-off facing the MPC continues to lessen and the policy decision accordingly becomes more conventional".

"We would like to buy SGD/TWD cross with a target of 22.5 and then 23.0 on hopes for the SGD’s outperformance compared to limited potential gains in the TWD. Meanwhile, we stay with our long CNH/KRW position," Scotiabank commented in its latest research report.