Euro woes less likely to rub off on Asia

American banking giant Citigroup expects Asia to become less vulnerable to the lingering woes in the Euro zone, while some emerging markets may even reap gains as their stronger fundamentals attract more capital inflows.

Still, a likely slide in the euro may not translate to an across-the-board rally in Asian currencies over the short term, Citi said in a July 11 macro commentary.

In its research, Citi said there were fundamental reasons that would warrant a “more persistently resilient” performance of Asian currencies.

In particular, Citi said it particularly favored Asian currencies where central banks cared enough about inflation to manage volatility and tolerate some appreciation, like the Chinese yuan, Indonesian rupiah and Korean won.

The bank also noted the Philippines to be among those that had joined China in making adjustment to reserve requirements.

Indonesia and Thailand are seen following suit in the future.

“Further steps to address risks to asset prices, particularly the property market in some countries like Hong Kong, Singapore and China and prudential regulations on bank lending, will also likely continue,” it said.

According to Citi, foreign reserve coverage has markedly improved in many Asian countries and the region is in a much stronger position to turn precautionary reserves into a line of defense for capital outflows.

That has made Asia less vulnerable to the Euro’s woes.

Also, Asia’s exposure to cross-border wholesale bank funding has diminished significantly. Despite strong loan growth, coverage is largely funded by retail deposits with limited exposure to wholesale funding.