Asian currencies down 1-2% post Brexit
Since last Friday’s Brexit outcome, the pressure on Asian currencies was relatively small in the range of 1-2%. There are several reasons for that. Asia exports to UK are relatively small, in the range of 1-3% of total exports in 2015. In addition several Asian central banks were reported to have intervened in the currency markets to smooth volatility. There is also some market reassurance that US dollar liquidity will be provided by central banks in the event of liquidity squeeze. South Korea has also recently announced that they are planning a KRW 20 trln (USD 17bn) fiscal stimulus to support economic growth. That has helped to limit losses in the South Korean won. Last but not least, commodity markets have been relatively resilient.
FX-Flash-Asian-FX-no-blood-bath-post-Brexit-29-June-2016.pdf (57 KB)
Indonesian rupiah gains after tax amnesty announcement
The Indonesian rupiah (IDR) strengthened after the tax amnesty was approved by the parliament on 28 June. The tax amnesty will be implemented in July and run for about nine months . According to Bank Indonesia (BI), the tax plan is expected to result in about IDR 560 trillion (USD 42.5bn) of funds back onshore and boost government revenue by about IDR 53 trillion. The size is significant given that the projected inflows of USD 42.5bn is about twice the magnitude of Indonesia’s current account deficit in 2015. In addition, economic growth is projected to be boosted by about 0.3pp. The government has stated that they intend to issue infrastructure bonds to absorb inflows from tax amnesty. Bank Indonesia has also stated that they will seek to absorb excess liquidity so that the IDR will not appreciate too much. Indeed, we expect BI to replenish their foreign currency reserves and not tolerate IDR gains past 13,000 against the US dollar.
Chinese yuan fixed weaker, stable against basket of currencies
In line with broad US dollar strength in the past few days, the Chinese yuan was fixed weaker but has remained relatively stable against a basket of currencies. The offshore CNH discount widened from 50 pips on 23 June to more than 350 pips yesterday before narrowing to 250 pips during early Asian trading hours today as risk sentiment improved. Last week, it was reported that the People’s Bank of China (PBoC) is discussing with onshore lenders to allow them to trade in the CNH market. In our view, this will narrow the CNH divergence with onshore rate if implemented. Looking ahead, we maintain our view that the PBoC will limit depreciation pressures in the yuan as that may magnify capital outflow concerns.