March 19, 2019 / 11:19 AM / a month ago

Column: India rupee surge exposes FX risk in key Asia elections

SYDNEY (Reuters) - As India, Indonesia, the Philippines and Thailand prepare to head to the polls, the Indian rupee’s recent sharp rebound is a telling reminder for investors to beware the potential for heightened volatility as they hunt for opportunities around upcoming elections.

An India Rupee note is seen in this illustration photo June 1, 2017. REUTERS/Thomas White/Illustration/Files

The rupee has appreciated 4.2 percent to 68.45 versus the U.S. dollar in three weeks as investors cheer the brightening re-election prospects of Prime Minister Narendra Modi and the ruling Bharatiya Janata Party .

The elections come at a crucial time for these countries, all faced with slowing economic growth and global trade tensions, as well as domestic political risks and a more uncertain geopolitical landscape within the region.

Hence investors inclined to stay long the rupee and Indonesian rupiah for their higher yields, and even look to increase exposure on any dips stemming from election-related surprises, may also consider prudent strategies to combat the associated volatility.

Stock market investors of all four countries may be doing something similar considering that selloffs following previous election upsets have invariably been reversed — India in 2004 being a case in point.

With central banks globally turning more dovish, led by the Federal Reserve’s wait-and-see stance on interest rates, Asia ex-Japan markets should have an effective back-stop.

LEVELS TO WATCH

Thailand votes on March 24, Indonesia on April 17 and the Philippines has mid-term elections on May 13. Around 300 million people, slightly more than 45 percent of the entire population of Southeast Asia, are likely to be registered to cast their votes in these countries.

General elections in India, the world’s most populous democracy, will be held in stages from April 11 when 875 million people will be eligible to vote in 1 million polling stations across the country. Results are due on May 23.

Following the rupee’s recent rally, USD/INR has broken below pivotal support at 68.79-68.86, previous significant peaks for the dollar in 2013 and 2016. This has opened the scope for a move to 68.26, an interim low in August 2018, followed by 67.54, the 61.8 percent retracement of the USD/INR surge in 2018.

In Indonesia, President Joko Widodo’s favourable re-election chances and the prospect of more market-friendly reforms should result in a stable to stronger rupiah. While the IDR has shed 3 percent from its February peak — following a 9 percent rise since October — the dollar is unlikely to move past resistance at the converging 21- and 55-week moving averages at 14320-330 and the 38.2 Fibonacci retracement of the October-February fall at 14410. A rally to these levels is a selling opportunity for a resumption of its decline, to 13885-13920 initially.

The Thai baht, which had shed 2.9 percent since hitting a five-year high of 31.07 to the dollar on Feb. 20, has stabilised, with the USD finding resistance at 31.93-32.00, a double Fibonacci retracement level. But the chances of USD/THB resuming its downtrend appear limited with a greater risk of a rally to 32.20 and 32.42-47 on fears of political instability due to tensions between pro- and anti-junta parties .

The Philippine peso is likely to trade in a fairly stable range of 51.50-53.50, with the mid-term elections seen as a vote on President Rodrigo Duterte’s administration. While the opposition may struggle to make significant inroads in the House of Representatives, the race for the Senate’s 12 vacant seats is seen as crucial to whether Duterte further consolidates his grip on power.

CAVEATS

India, Indonesia and the Philippines have just stabilised after being caught up in the emerging markets maelstrom of 2018. So, whatever the outcome, investors will be keen to see any uncertainty kept to a minimum.

Inflows of $4.8 billion from foreign institutional investors have flooded Indian stock markets in February and March on the prospect of a BJP/Modi poll win. A hefty portion of these funds will head back out if the eventual outcome is a weakened Modi or a rag-tag coalition of opposition parties.

A woman holds her child as she casts her vote a polling station during state assembly elections at Kanhmun village, in the northeastern state of Mizoram, November 28, 2018. REUTERS/Jayanta Dey/Files

In Thailand, there is a risk of political gridlock. The dissolution of an opposition party by a Thai court, which raised questions about the fairness of the electoral process, has already led foreign investors to exit Thai shares, with the stock market down 3.7 percent since its peak on Feb. 25.

Asia has been a prominent beneficiary of surging inflows to emerging markets in 2019. Fiscal slippage, which is a common risk around elections, as well as rising trade and current account deficit concerns could quickly reverse this trend.

The wider backdrop of slowing global growth, U.S.-China trade tensions, Brexit uncertainty and higher oil prices also continues to exert a negative influence.

Editing by Sonali Desai and Burton Frierson

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