Correlation Breakdown as Asia, Latin America Diverge: Currencies

Correlation Breakdown as Asia, Latin America Diverge
A worker inspects Kia Motors Corp. vehicles bound for export at the port in Mokpo, South Korea. While China’s imports from Brazil slumped 17 percent in October from a year earlier, the Asian nation is buying more South Korean cars and smartphone chips from Taiwan. Photographer: SeongJoon Cho/Bloomberg

Asian currencies that once moved in lockstep with their Latin American peers are diverging by the most ever as China attracts investors to the region without boosting commodities, the main exports for Brazil and Chile.

The four-week correlation between the currencies of the two regions reached minus 1 last month, meaning they always move in the opposite direction, according to index data compiled by Bloomberg and JPMorgan Chase & Co. As recently as May, the correlation was plus 1 as the indexes moved in tandem. The Chinese yuan has climbed to 19-year highs amid gains in retail sales and the South Korean won reached the strongest since 2011, while Brazil’s real and the pesos in Mexico, Chile and Colombia weakened over the past two months.

“Usually when people buy China, it boosts currencies in both Latin America and Asia,” Dirk Willer, the head of Latin American local-markets strategy at Citigroup Inc. in New York, said by phone. “But this time around, given that the commodity link isn’t working, people get bought up on Asia but not on Latin America. There’s a long-term structural story.”

As China’s economy has slowed, with gross domestic product forecast to increase 7.7 percent this year after gains of 9.3 percent and 10 percent the two previous years, it is moving away from commodity-dependent investment in factories and houses, sapping demand for Brazil’s iron ore, Chile’s copper and Colombia’s oil. The Standard & Poor’s GSCI Index of 24 raw materials has fallen 7.7 percent from a six-month high Sept. 14.

Sustainable Growth

While China’s imports from Brazil slumped 17 percent in October from a year earlier, the Asian nation is buying more South Korean cars and smartphone chips from Taiwan.

China is targeting more sustainable growth as it undergoes a once-a-decade leadership transition, with Xi Jinping replacing President Hu Jintao as head of the Communist Party last week.

Hu said in a Nov. 8 speech that the world’s second-largest economy after the U.S. must double per-capita income and GDP by 2020 by innovating and boosting domestic demand. A stronger yuan increases the purchasing power of Chinese consumers by making imports cheaper.

The Bloomberg Asian index, which tracks 10 currencies in the region including the yuan, won and Malaysian ringgit, has gained 2.3 percent this year through yesterday to 117.77, while a similar gauge for Latin American currencies fell 0.9 percent to 103.43. The two measures are poised to diverge on an annual basis for the first time since 2006.

The Asian index was little changed as of 2:04 p.m. in New York. The Latin American gauge rose 0.1 percent.

Smartphones, Cars

The correlation was minus 0.2 last week, after reaching minus 1 on Oct. 19, and has been negative for six consecutive weeks, the longest stretch since 2004, Bloomberg data show.

As China cut its growth target to 7.5 percent this year, following an expansion of 11 percent annually over the last decade, imports from Brazil slowed after surging more than 18-fold between 2003 and 2011.

In contrast, China’s rising demand for smartphones helped Taiwan Semiconductor Manufacturing Co., the world’s largest contract manufacturer of chips, post record sales and profit in the third quarter. Seoul-based Hyundai Motor Co. reported a 13 percent increase in earnings, beating analysts’ forecasts, as sales in China, the world’s largest car market, exceeded its target.

Asian currencies make up six of the top seven performers in emerging markets this quarter, led by the 2.7 percent gain in the South Korean won.

The currencies rallied after China, the largest trading partner for South Korea and Malaysia, said retail sales climbed in October at the fastest pace since March. Sales of furniture and communication appliances increased at least 24 percent.

Peg Defended

The yuan rose 0.2 percent last week and reached 6.2252 per dollar on Nov. 14, the strongest level since China unified official and market exchange rates at the end of 1993, according to the China Foreign Exchange Trade System. It traded at 6.2326 per dollar today in Shanghai, after reaching 1 percent premium to the central bank’s daily official rate, the maximum it’s allowed to fluctuate.

In Hong Kong, the capital inflow was so strong that the central bank had to buy $4.2 billion this month to defend its dollar peg for the first time since 2009. South Korea’s won rose to a 14-month high of 1,080.95 today as stock exchange data shows that overseas investors bought the country’s shares for the first time in nine days.

Currencies in Latin America are slumping with prices in commodities, which account for half of the region’s exports. The Chilean peso has declined 0.7 percent this quarter and the Brazilian real fell 2.6 percent and reached 2.0851 per dollar on Nov. 16, the weakest level since May.

Fiscal Stimulus

China has overtaken the U.S. as Brazil’s largest trading partner since 2009, buying everything from iron ore to soybeans. It’s also the world’s largest consumer of copper, which accounts for half of Chile’s exports.

Three years ago, China fueled a rally across emerging-market currencies and prompted a commodities boom with 4 trillion yuan ($642 billion) of spending on housing, highways and airports amid the global financial crisis. The real and Chilean peso rallied at least 26 percent in 2009, while the Indonesian rupiah rose 18 percent and the won gained 8 percent.

China has avoided a similar fiscal stimulus as government curbs on property sales reduced production of steel and cement. Domestic commodity prices, such as coal, copper, steel and aluminum, have slumped 32 percent from the peak in July 2008, data compiled by Goldman Sachs Group Inc. show.

Relative Consumption

“Beijing has been focusing more on the quality of the growth, rather than the size of the growth, which is very, very important,” Stephen Jen, the managing partner at hedge fund SLJ Macro Partners LLP in London and the former head of currency research at Morgan Stanley, said in a telephone interview. “The actual demand for commodities is not growing even though things are stabilizing,” which may be hurting Latin currencies, he said.

China’s consumption is on track to surpass investment as the biggest contributor to growth for only the second year since 2001. In the first nine months, consumption accounted for 55 percent of the expansion, exceeding that from investment, Sheng Laiyun, a spokesman at the National Bureau of Statistics, told reporters in Beijing on Oct. 18.

Retail sales rose 14.5 percent in October from a year earlier, outpacing the growth in industrial production for the 20th month, which Jim O’Neill, chairman of Goldman Sachs Asset Management, called “an extremely good sign that the Chinese economy is rebalancing.”

Buying Reals

The nation’s current-account surplus, the broadest measure of trade and service, probably shrank to 2.3 percent of its gross domestic product this year from a record 10 percent in 2007, according to the International Monetary Fund.

Global economic growth will eventually lead to an increase in commodity prices that will benefit some currencies in Latin America, said Yerlan Syzdykov, who oversees emerging-market bonds at Pioneer Investments, which has 153 billion euros ($195 billion) of assets. His $933 million emerging-market bond fund has returned 24 percent over the past year, beating 98 percent of its peers, Bloomberg data show.

“We might see better commodity prices going forward,” said Syzdykov, who’s buying the real and Mexican peso, in a telephone interview on Nov. 13. “We will see a pickup in selective Latin American currencies.”

Ringgit, Pesos

The U.S. is also showing signs of a revival. The Thomson Reuters/University of Michigan preliminary consumer sentiment index rose to 84.9 in November, the highest since July 2007, after employers hired more workers than forecast in October, with payrolls expanding by 171,000 after a 148,000 gain the previous month.

Asian currencies remain the cheapest among emerging markets based on the Economist’s Big Mac index, which measures the local cost of McDonald’s Corp.’s burgers around the world.

The Malaysian ringgit is undervalued by 45 percent, while the Philippine peso is 34 percent below its fair value, the index shows. In contrast, Brazil’s real is overvalued by 11 percent.

While countries such as Brazil and Colombia are taking measures to weaken their currencies in an attempt to shore up exporters, the strengthening yuan is encouraging Asian export competitors to be more tolerant of currency appreciation, according to David Loevinger, former senior coordinator for China affairs at the U.S. Treasury Department.

“There seems to be less resistance to currency appreciation now than in previous recoveries,” Loevinger, now a managing director for Asia economics and investment strategy in Los Angeles at TCW Group Inc., which oversees $135 billion, said in an interview on Nov. 13. “The composition of China’s growth is changing. Consumption looks pretty strong.”

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