Asian currencies continued along their strengthening trend, amidst positive current account positions and strong capital inflows into regional markets (Charts 7, 8 & 9). These inflows have been led by bullish sentiment, on the back of positive growth and low inflation expectations, as well as abundant liquidity and the global search for yield. While the strong inflows have brought about some positive developments – including stronger external balances, lower domestic interest rates as well as moves to further liberalise current and capital accounts – they have also resulted in a run-up in asset prices and rapid monetary and credit expansion in some countries. In addition, the equity market sell-off in February-March this year highlights that financial conditions in Asian economies remain vulnerable to shifts in foreign investors’ risk appetites. The unwinding of carry trades is also a risk to Asian markets which are reliant on portfolio flows.
Going forward, should foreign investors re-adjust upward their risk premia, a sharp reversal of short-term capital flows could take place and lead to another bout of volatility in regional financial markets. While conditions underpinning financial stability appear to be firmly intact at present, MAS will continue with close surveillance, as well as ensure the adequacy of buffers in the financial system to contain the impact of market volatility.