The Savage Garden of Asian Currency Intervention

I truly, madly, deeply do believe that this is a rather retro post in more ways than one: The well-respected currency commentator Simon Derrick of the Bank of New York suggests in the Financial Times op-ed below that, just like at the outset of the Asian financial crisis, many countries in the region are gearing up for currency intervention measures to once again defend their respective monetary units. In recent times, the US dollar has been taking it on the chin, and the worry has been more about declining Asian export competitiveness via a weakening dollar. More recently, however, Asian countries have become more concerned about domestic inflation. This sort of inflation has made more Asian countries think about wading into the currency markets again--not so much to defend their currencies from speculators a la 1997, but to control inflation circa 2008. On 21 May 2008, USD/KRW reached a recent high of 1057.60 before large-scale intervention kicked in [see marked area in above chart]. So, let us begin with the Economic Times' take on South Korea spending nearly $2B to prop up the won.:

South Korea intervened three times to support the sliding won on Tuesday and warned the currency may have fallen too far, as it wrestled with the problem of containing inflation without choking off economic growth. The Bank of Korea is under political pressure to cut rates to help spur growth in Asia's fourth-largest economy, and minutes from an April policy review showed two of the six board members favoured a rate cut for the first time since November 2004.

The central bank is resisting that pressure because inflation is at a four-year high, partly due to a surge in oil prices and won weakness, which is making imports more expensive. The currency, Asia's second-worst performer this year, may have fallen too far, Choi Jong-ku, head of the finance ministry's international bureau, told Reuters as news of the interventions began surfacing and pushed the won to a one-week high.

The foreign exchange authorities were seen selling almost $1 billion on Tuesday afternoon for won after dumping up to $800 million during the morning session, traders said. The won's rise on Tuesday revived expectations among investors that the central bank would have more room to cut interest rates at its next review on June 12.

Others said the Bank of Korea, hemmed in between rising inflation and the wishes of a growth-hungry new government, would want to avoid cutting rates for fear of stoking inflation. "The Bank of Korea's governor implied at his post-meeting comments in May that as long as the won turns weaker, it would be impossible for an interest rate cut in the near future," said Park Jong-yeon, fixed-income analyst at Woori Investment.

Annual inflation at 4.1 percent in April was above the central bank's 2.5 percent to 3.5 percent target range for a fifth straight month. "The won fell as oil prices jumped but we are worried that the won's fall might be excessive," Choi said. He also said the government was worried the won's fall was due to excessive herd behaviour in the currency market.

The intervention on Tuesday marks the second attempt to shore up the won in under a week. That pushed up the won to a session high of 1,034.9, matching the high on May 19, which was the strongest since May 8. The South Korean authorities spent an estimated $500 million last Wednesday when the won weakened past 1,050 per dollar to a 2-1/2-year low…

Analysts say massive intervention indicates the government is more concerned about inflation than growth but it still likely wants a relatively weak currency to support exports to help meet an ambitious economic growth target of 6 percent this year.

The government has repeatedly backed a weaker won to help boost growth in the export-focused economy, but analysts say fears that it will also lift inflation at home means the authorities will likely step in to prevent any nosedive. "The comment (by Choi) comes as the government needs to show action as a weaker won boosts the impact of surging oil prices on domestic demand," said Jeong My-young, an analyst at Samsung Futures Inc. "But the authorities will never allow the won to strengthen past the 1,000 (per dollar) again," she added.

Following on from this, the redoubtable Mr. Derrick suggests that other countries in the region have, ah, gone to the moon and back in similarly undertaking currency intervention:

Rumours of currency market intervention by a variety of Asian central banks are likely to gather pace, says Simon Derrick, strategist at Bank of New York Mellon. As well as reports that the Bank of Korea had re-entered the market to support the won, Mr Derrick points to talk of currency support action by the central banks of Taiwan, the Philippines and Indonesia. “Comments from a variety of central bank officials indicate that rising inflationary pressures were likely behind these operations,” he says. For example, Vietnam’s annual level of inflation leapt to 25.2 per cent in May from just 7.2 per cent just 12 months ago.

The causes of these sharp rises seem relatively understandable given the recent dramatic increases in food and energy costs globally. Hanoi, Mr Derrick points out, estimates that food prices this month jumped 67.8 per cent year-on-year. Adding to the woes of the central banks is the simple fact that the performance of many of these currencies against the dollar has tended to be a mirror image of the latest commodity price moves, he says. “In the absence of a sharp turnaround in commodity prices it seems reasonable to suppose that these currency pressures will only continue to mount. “As such it seems likely that the central banks of the region will continue their support operations as they try to stop the impact of rising commodity prices being exacerbated by sharp local currency losses.”

Dammit, it's like 1997 all over again, albeit for slightly different reasons. Cue up the Savage Garden, chick-a-Cherry cola, and pretend it's like old times. UPDATE: The Philippines has been spotted selling dollars to the tune of an estimated $150M. It's flashback time, baby. From Reuters...

The Philippine peso hit a seven-month low at 43.925 per dollar, down about half of a percent from Wednesday's close, as investors bought dollars after solid US durable goods data on Wednesday eased concerns over the US economy.

But intervention by the central bank to sell dollars helped limit the peso's further declines, traders said. "They (the central bank) were in the market this morning. I guess they sold the dollar at 43.85 and then at 43.90," said a trader in Manila. "I think the market is trying to target the 44 level, but the central bank does not want the peso to depreciate that fast and was trying to slow it down," he said. Some traders estimated the size of the intervention at $150 million.