FX Watch – Asian FX recovery to last?

by: Roy Teo , Arjen van Dijkhuizen

151009-FX-watch-Asian-FX1.pdf (143 KB)

Less bearish on Asian currencies as cautious Fed supports Asian currencies temporarily

Asian central banks likely to ease monetary policy to support and re-inflate economy…

…reducing Asian currencies’ carry attractiveness

Our new year-end forecast for USD/CNY are 6.40 (2015) and 6.55 (2016), respectively

Weaker euro, Chinese yuan and Japanese yen will weigh on Asian economies’ exports price competitiveness

Indonesian rupiah to underperform other Asian currencies


Cautious Fed to support sentiment in Asian currencies

Asian currencies have recovered after the US jobs report on 2 October, which revealed that non-farm payrolls were weaker than expected in August and September. We now expect the US Federal Reserve to delay tightening monetary policy until June 2016 (from December 2015). This should support sentiment in Asian currencies in the coming weeks. Hence we have become less bearish on Asian currencies, with the exception of the Thai baht (THB).

Recovery in Asian currencies temporary

We expect the current recovery in Asian currencies to be temporary for the following reasons. Reduced fears of capital outflows from Asian economies will allow more flexibility for Asian central banks to ease monetary policy to support the economy. This will reduce Asian currencies’ carry attractiveness. In addition, a stronger currency is not likely to be welcomed given the current weak exports and inflation dynamics in most Asian economies. A slowing Chinese economy (we forecast economic growth of 6.5% in 2016, versus around 7% this year) will provide less support to Asian exports. Last but not least, a weaker euro, Chinese yuan and Japanese yen will weigh on Asian exports competitiveness.

Chinese yuan at equilibrium; no depreciation?

The People’s Bank of China (PBoC) determination to support the Chinese yuan, after the August yuan devaluation caused widespread market turmoil, and our more cautious Fed view have made us less bearish on the yuan. However, we still expect some depreciation, as a weaker yuan helps to inflate the economy and support exports. Our 2015 and 2016 year end USD/CNY forecasts are now 6.40 (from 6.55) and 6.55 (from 6.75). We expect the offshore yuan (CNH) divergence with the onshore yuan (CNY) to be minimal in the coming months as financial markets sentiment improve. However the CNH discount to the CNY will widen next year due to a slower Chinese economy and tighter monetary policy in the US, which is not yet fully priced in.

THB forecasts downgraded

We now expect the Thai baht (THB) to depreciate further to 36.8 against the US dollar (from previous forecast of 36.4). Our more bearish view on the THB is due to continued sluggish consumer and business confidence which will weigh on economic growth and leads to rising risks for the banking sector (higher NPLs). Political uncertainty will remain a headwind to foreign investors inflows. In addition, a weaker THB is needed to support exports and re-inflate the economy. Furthermore, we think that it is unlikely that the Bank of Thailand (BoT) will support the THB aggressively given that FX reserves are now about 10% lower than during the Fed tapering dry run in mid-2013. The BoT could even aim at replenishing its FX reserves in the coming months. If market conditions are conducive in the coming months, a rate cut to stimulate the economy is also likely.

IDR to underperform other Asian FX

We expect the Indonesian rupiah (IDR) to underperform other Asian currencies well into 2016. Indonesia’s external imbalances, low real short term interest rates and weak economic fundamentals persist. We also expect Bank Indonesia to replenish its foreign currency reserves which have declined by about 10% this year.

151009 Asia Watch