Key facts
- Asian central banks are intensifying scrutiny of offshore currency derivatives to combat speculation.
- Currencies in South Korea, India, and the Philippines have hit multi-year or record lows.
- High oil prices and foreign fund outflows are exacerbating currency pressures.
- Central banks are intervening in offshore markets, impacting foreign exchange reserves.
- Analysts suggest that fundamental economic shifts are necessary for sustained currency recovery.
Asian central banks are intensifying efforts to curb offshore foreign exchange speculation as a strong dollar, high oil prices, and foreign fund outflows pressure regional currencies. Policymakers are increasing oversight of derivatives like non-deliverable forwards (NDFs), which allow trading outside local markets and can significantly influence Asian currencies due to onshore convertibility restrictions.
South Korea's finance ministry announced it will enhance oversight of offshore currency derivatives. The Philippines has requested banks limit NDF contracts to economic purposes, while India has reduced banks' net open position limits to $100 million. Indonesia, which recently raised interest rates, has stated its central bank is actively intervening in global currency markets to support the rupiah, which has fallen below 18,000 per dollar.
These measures aim to mitigate the impact of offshore trading on local markets. The Korean won has reached its lowest point since the global financial crisis, and the Indian rupee and Philippine peso have hit record lows. Analysts, however, express skepticism that these actions alone will reverse the downward trend without fundamental economic improvements.
NDFs constitute about 4% of the global $10 trillion daily FX market but can have an outsized impact in Asia. Authorities have previously attempted to reduce this influence; India, for instance, has worked to attract NDF activity onshore to its GIFT City financial hub. Experts note that easing onshore restrictions and ensuring sufficient liquidity could diminish the need for NDFs, as seen with the Singapore dollar and Thai baht.
Despite warnings against offshore markets, some central banks have intervened directly, contributing to a decline in regional foreign exchange reserves. The Reserve Bank of India has been particularly active in selling dollars, with its offshore derivative positions likely reaching around $115 billion. Bank Indonesia has also sold dollars to stabilize the rupiah.
Some investors argue that currency weakness stems from country-specific economic issues rather than offshore trading. India is experiencing significant capital outflows, with global funds withdrawing a record $30 billion from stocks this year. In Indonesia, concerns about the economic outlook and fiscal trajectory under President Prabowo Subianto are growing. The Philippines faces renewed inflation pressure from high oil prices, and South Korea has seen substantial foreign investment exit its stock market despite recent rallies.