Asian Currencies Tumbled Monday, What will Tuesday Bring ?

Asian currencies sold off on Monday. Foreign investors were sellers of numbers regional equity markets (Indonesia, Philippines, Taiwan and Thailand) and currencies amid heightened fears of additional tightening and/or capital controls. Although China did not appear to overtly tighten policy after the 4.4% CPI was reported last week, many continue to expect that another move is coming.

In addition, South Korea's central bank meets this week and there has been increased speculation of a hike. In a Bloomberg survey 6 of 13 expect a 25 bp hike to 2.50%. With such a divided market, the headline risk is palpable regardless of the precise decision. Korean officials are talking about reviving a tax on foreign investors bond holdings. Indonesia is also thought to be looking to check capital inflows.

Monday is not the first day Asian currencies have fallen. In fact, over the past five sessions, the top 10 Asian emerging market currencies are weakened except the Chinese yuan. Given the vast flows into that region this year, the risk of capital controls and fear of additional efforts that will slow the Chinese economy, there appears to be scope for additional profit-taking in the emerging Asia currency bloc.