A slowdown among Asian economies: Running out of puff
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By Roger Blitz
30 September 2015
Asian currencies can expect another period of downward pressure after ending the quarter at their lowest level since 2009, foreign exchange analysts predicted.
After trending lower over the first half of the year, Asian currencies outside of Japan plunged much lower after the shock of the August 11 devaluation of the renminbi, which weighed heavily on China’s regional trading partners.
Their fall is illustrated in JPMorgan’s trade weighted Asia dollar index, which follows 10 leading Asian currencies. These include China’s renminbi, given a weighting of more than 40 per cent.
The index reached a quarterly high of 111.67 in July but quickly faded. On Monday, the index hit a low of 106.60, a level not touched for six years, although there were signs on Wednesday of a pick-up.
The expectation is that Asian currencies will continue to decline. Currencies of emerging Asian economies would “face the brunt” of slowing Chinese growth and a weaker renminbi, Barclays predicted, with South Korea and Taiwan particularly vulnerable because of their trade exposure to China.
The bank’s foreign exchange strategists pointed out that the current falls were modest compared to the declines in emerging market currencies in the late 1990s. After stripping out the renminbi, Asian currencies had fallen only 5 per cent in the past two years, said Barclays.
Aroop Chatterjee, a foreign exchange strategist at Barclays, said with Asian growth trending lower, led by China, and the end of the renminbi’s effective peg to the dollar, currencies in the region would continue to fall.
“From a policy perspective, we can expect greater tolerance for currency depreciation and more accommodative monetary policy from central banks. We have seen a need for Asian central banks to address the deflationary shocks to their economies,” Mr Chatterjee said.
HSBC analysts said one of the consequences of a shift in Chinese policy was permanent two-way volatility in the renminbi. That would transfer to higher volatility for other Asian currencies and make it harder for them to sustain the outperformance of the past decade against EM and G3 currencies.
The quarter has seen the Malaysian ringgit down 14.2 per cent against the dollar, as prime minister Najib Razak confronts threats to his authority, although the fall in the South Korean won is a more respectable 5.7 per cent, while Taiwan’s dollar is down more than 6 per cent.
Indonesia, also facing political uncertainty, has seen its rupiah fall to its lowest level since the height of the 1998 Asian crisis and reserves have been cut by around 10 per cent since February.
Daniel Tengauzer, head of EM FX strategy at RBC Capital Markets, said: “Investors were most bearish about Malaysia and less concerned about Indonesia. India remains the darling.”
India’s rupee has been one of the weaker Asian currencies in recent weeks but has been an outperformer since the decision by the US Federal Reserve to keep rates on hold in September.
The dollar has resumed its upward path since then, bolstered by more optimistic noises about a rate rise from Fed members, including chair Janet Yellen.
Bank of America Merrill Lynch said it expected the rupee to continue to outperform the region, assuming that India’s central bank supports it at around the Rup65.00 level to the dollar.
The rupee has gained some solidity since Monday after the Reserve Bank of India cut rates by 50 basis points.