Currencies and equities fall sharply, further falls likely

Following a strong start to the year, most Asian currencies and equities fell sharply in May. The main reason is that renewed concerns over the euro-zone’s future brought a return in global risk aversion, prompting outflows of capital from Asia and other emerging markets. The worst-hit currencies within Asia were the Aussie and Kiwi dollars, reflecting their sensitivity to falling commodity prices. The Indian rupee also weakened significantly, as the turn in global risk appetite was compounded by concern over local policymaking. Most equity markets in the region were down by around 5-10% over the past month, while currencies lost an average 3% against the US dollar. If the crisis in the euro-zone continues to worsen as we expect, further downward pressure on Asian currencies and equities are likely.