Buy Won, Rupiah, Rupee on Cheaper Oil, RBS Advises

By Patricia Lui

Aug. 20 (Bloomberg) -- Investors should buy the Korean won, Indonesian rupiah and Indian rupee because the currencies will benefit from the drop in crude oil prices, according to the Royal Bank of Scotland Group Plc.

China's yuan and the Singapore and Taiwan dollars, Asia's top three performers during the first half, are likely to weaken as oil gets cheaper, according to research published today by the U.K.'s second-biggest bank. The recommendations are based on a model analysts designed to compare performances of regional currencies against changes in the prices of oil and stocks.

``Singapore's dollar and the yuan are the region's two most vulnerable currencies,'' wrote Chia Woon Khien, an interest-rate strategist at RBS in Singapore. ``In contrast, the won and the rupiah would be relatively buffered by their positive correlation to falling oil prices.''

The Singapore and Taiwan dollars are the two biggest losers among Asia's 10 most-active currencies outside Japan this quarter, weakening as the price of crude on the New York Mercantile Exchange dropped 18 percent. In the first half of the year they and the yuan were the best performers as oil surged 46 percent.

The won and the rupee were among the region's three biggest decliners in the first half, while the rupiah is the sole gainer among the three since the end of June. Crude recently traded at $114.90 a barrel in New York, 22 percent lower than the record $147.27 reached July 11.

`Oil, Stocks Drivers'

``The oil price was definitely the dominant common driver of the regional currencies over the past 18 months, explaining as much as 66 percent of their co-movements,'' according to the note, which added that stocks were the ``second common factor,'' accounting for up to 26 percent of movements during the period.

RBS examined a scenario in which oil prices fell 10 percent and stock markets rose by the same amount because cheaper crude boosts companies' profits.

The yuan, the Thai baht and the Singapore and Taiwan dollars would weaken as the ``negative direct impact from falling oil prices would be too large to be offset by the positive indirect impact from the equity market,'' the bank's analysts wrote.

The won, rupee and the Philippine peso ``will benefit the most,'' Chia wrote.

Hong Kong, Indonesia

Hong Kong's dollar and Indonesia's rupiah are ``neutral'' due to ``weak correlations'' to both oil and stocks, RBS added.

Investors should buy the U.S. dollar and sell the Singapore currency, the yuan and the ringgit on a three-month forward basis in equal proportions, the note suggested. It also recommended buying the won and selling Singapore dollars on a three-month forward to earn a positive carry of 70 basis points. A basis point is 0.01 percentage point.

Buying the won, rupee and rupiah and selling the yuan, Singapore and Taiwan dollars on a three-month forward basis would earn a net carry of 5.51 percent, RBS' note read.

Forwards contracts are agreements in which assets are bought and sold at current prices for settlement at a later specified time and date. In carry trades, investors get funds in a country with low borrowing costs and invest in one with higher interest rates, earning the spread between them.

To contact the report on this story: Patricia Lui in Singapore at plui4@bloomberg.net