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New Currencies Make Waves in Forex Market

Yuan, won, NT$ the new 'exotics' replacing ringgit, baht and rupiah

By VIKRAM KHANNA - Business Times 22 April 2004

(SINGAPORE) North Asian currencies like the Chinese renminbi, the Korean won and the New Taiwan dollar are among the new currencies being actively traded in Singapore's foreign exchange market for regional currencies (or so-called 'exotics'), which was once dominated by trading in the ringgit, rupiah and baht.

Chairman of the Singapore Foreign Exchange Market Committee Loh Boon Chye said that a growing proportion of regional currencies is traded in the form of 'non-deliverable forward (NDF) contracts' in which positions on regional currencies are taken, but there is no actual delivery in these currencies and trades are squared off in major currencies like the euro and the US dollar.

Mr Loh, who heads Deutsche Bank's Global Markets operations in Asia (covering trading in foreign exchange, credit and forex derivatives, fixed income, structured products and commodities), said that one of the projects undertaken by the Singapore forex market committee was creating the documentation for NDF trading.

'This has made clients more comfortable with hedging and trading,' Mr Loh said.

He pointed out that among the North Asian currencies, trading in New Taiwan dollars (NTD) and Chinese renminbi NDF contracts has been the fastest growing. Although exact figures are unavailable, Mr Loh estimates that NTD trading has soared to around US$32 billion a month in 2003, from US$8 billion in 2001 and US$4 billion in 1998. The growth was largely driven by the development of the corporate debt market in Taiwan over that period - as well as a recovery in the stock market - which has prompted market players to gain exposure to the currency.

Mr Loh pointed out that monthly trading in renminbi amounted to around US$8 billion last year, compared with US$2 billion in 2001 and US$1 billion in 1998. He noted that a number of market players are expecting a revaluation of the renminbi, partly due to pressure from China's major trading partners, especially the US and Japan. China's central bank, which has kept the renminbi pegged at a rate of 8.28 to the US dollar since 1994, has also indicated that it plans to move towards a more flexible exchange rate arrangement. As a result, there is increasing interest among market players to gain exposure to the renminbi, which they can do in Singapore through the NDF market.

Trading in Korean won NDF contracts has also been growing, according to Mr Loh. Although growth has not been as fast as in the case of renminbi and NTD, volumes are relatively high. He estimated that monthly NDF trades in the won amounted to US$40 billion last year, compared with US$20 billion in 2001 and US$8 billion in 1998. Like Taiwan, Korea, too, has been developing its debt markets (for both sovereign and corporate paper). As well, it has sold substantial amounts of restructured corporate assets to overseas investors following the Asian crisis, which also affected Korea. The asset sales helped fuel demand for the won, which further increased with the recovery of the Seoul stock market in the post-crisis years.

Mr Loh pointed out that although the NDF trading volumes in North Asian currencies are still small relative to volumes in major currencies, the margins earned from such trading are higher, because the markets are less liquid. However, liquidity has been improving year by year, he said, which is both a cause and a consequence of Singapore strengthening its position as Asia's premier centre for trading in South-east Asian as well as North Asian currencies - except for RMB trading, where Hong Kong is ahead.

'Once you create the infrastructure, more players come in, because players want to be where the other players are,' Mr Loh said.