Expert commentary on Asian currencies
Sean Yokota, head of Asia strategy at Nordic corporate bank SEB, has commented on Asian currencies and highlights three possible scenarios going forward.
He said: “The multi-year, relentless USD strength is taking a toll on Asian currencies. USD strength started in 2011 and, at first, only the currencies with current account deficits, INR and IDR were taken down. However, now the third group of Asian currencies represented by Malaysia – MYR – are succumbing to USD pressure. Even currencies with improved current account positions such as KRW and TWD are losing to USD strength. The latest development is that outperformers such as SGD, THB and PHP, are finally starting to lose value vs USD and leaving China alone.
“We see three possible scenarios going forward. First, the super dollar rules and everything heads lower regardless of how much adjustment currencies have experienced already. The second scenario is the opposite where USD strength subsides as markets find out after several rate hikes that the world is back to normal. Asia and EM are beta to the US cycle and fundamentals improves via better exports and stabilizes vs USD. Third, we get mean reversion where the outperformers drop more to play catch-up.
“We think the most likely scenario is a combination of continued USD strength and the outperformers correcting more because we see the CNY, leader of Asian currency outperformance for the last decade, facing depreciation pressures. We saw this become apparent when a comment from the State Council started speculation of further band widening of the USD/CNY spot from current limitation of +/-2%. A more freely traded CNY speculation weakened CNY rather than strengthening it, showing that market pressures are tilted to CNY weakness right now.
“In addition, as the long-term flows such as current account and FDI stabilise, the value of CNY will be more determined by capital flows and return on capital. The lost confidence in the equity market has reminded domestics that capital account opening and financial market liberalisation typically leads to more volatility, up and down, which makes it difficult to keep capital back home and attract large amounts of capital from foreigners.
“With that said, we will not short CNY because it is a manipulated currency and China has plenty of ammunitions such as FX reserves and capital controls to outlast people like us who focus on returns in the shorter three-to-12-months horizon. We recommend shorting the more flexible currencies that have outperformed, which are THB and PHP.
“We think PHP can weaken more for three reasons. First, growth outlook is weak as domestic demand cools from slowing credit cycle. The Philippines was the darling in Asia where it started to grow faster than China. However, the growth was driven by loose monetary policy. Now with inflation bottoming out it will be difficult to keep policy looser. The last two rate hikes in 2014 have already started to slow the credit cycle.
“Second, we see a shift lower in remittances. Post-global financial crisis remittances were growing by about 7% year-on-year but, since this year, the average has sunk towards 5%. This shift lower derives from weaker remittances from Europe, the Middle East and Asia, which make up more than 50% of total remittances. The weaker European economy, lower oil prices and stagnant Asian growth stemming from China will weigh on demand for overseas Filipino workers.
“Third, we like to be short PHP during August and September, where remittances seasonally slow. Remittances tend to increase during Catholic holidays such as Christmas and Easter, and decrease in other months.”