Asian currencies are poised to extend declines amid concern an increase in borrowing costs in China and a weakening yen threaten economic growth in the region, JPMorgan Chase & Co. said.
“A trend of bearish” Asian currencies will “kick off,” JPMorgan analysts including Hong Kong-based Bert Gochet wrote in a report yesterday. “Worries over China’s tight liquidity stance generate downside risks to growth.”
China’s money market rates jumped in December to a six-month high, raising concern that tighter lending conditions may slow the world’s second-largest economy. The yen’s 15 percent decline over the past year is fueling speculation that a cheaper currency may help Japanese companies grab export market share from its competitors in South Korea and Taiwan.
The Philippine peso touched the weakest level since 2010 yesterday on concern the Federal Reserve may accelerate the withdrawal of stimulus as the U.S. economy improves. The Malaysian ringgit posted its biggest two-day drop since November, while the South Korean won fell 1.3 percent from the five-year high set in December.
The Fed started reducing its monthly bond purchases in January by $10 billion to $75 billion, reducing capital flows to emerging markets. The MSCI Emerging Markets Index of stocks has slid as much as 16 percent since May 22, when the Fed signaled its stimulus program could be trimmed.
China’s seven-day repurchase rate surged to 4.98 percent today in Shanghai, the highest level since Jan. 2, according to National Interbank Funding Center. New yuan loans slumped to a one-year low in December and money-supply growth eased, central bank data showed on Jan. 15.
The cash squeeze will persist this month because authorities are determined to curb shadow-banking financing and reduce banks’ reliance on interbank funding amid concerns about delinquent loans, Haitong International Securities Co., part of China’s second-largest brokerage, said in a Jan. 15 report.
The yen, which traded at 104.33 per dollar today, may yet reach 115 this year as the Bank of Japan weighs more stimulus to offset a sales-tax increase, former board member Nobuyuki Nakahara said in an interview yesterday.
The World Bank on Jan. 14 raised its forecast for global growth to 3.2 percent this year, while lowering the estimates for China and other emerging-market economies.
Based on conversations with customers, JPMorgan said local bond funds haven’t received any inflows so far this year. It would be the first time that has happened in January since 2008, JPMorgan said, citing data from research company EPFR Global.
The analysts recommend selling the ringgit as the “purest expression of positioning for a lack of EM local bond inflows.” Foreign investors held 45 percent of ringgit-denominated debt in November, the most among 10 developing countries, making Malaysia susceptible to capital outflows, according to Credit Suisse Group AG.
JPMorgan advises further “underweight” the Philippine peso, saying local interest rates are too low. Investors should also exit a bet that the South Korean won will rise as the yen weakens.