Don't Fear China, Say Top Currency Analysts Seeing Asian Gains

Yen Rally: How Much Further Can It Go?
  • ING, CBA see region's exchange rates building on Q1 rally
  • PBOC has strong reasons to keep yuan stable, says ING

The best forecasters of Asian currencies last quarter saw beyond the turmoil created by China’s slump to predict the gains their competitors missed. Now they’re breaking from the pack once again.

While the market consensus is for broad declines, ING Groep NV and Commonwealth Bank of Australia expect at least eight of 10 emerging-Asia currencies tracked by Bloomberg to appreciate by year-end, building on their strongest quarter since 2010.

Rather than being a source of disruption, the banks forecast China will be an anchor for its neighbors through the rest of this year, driving gains in their currencies. It will do that, they say, by supporting yuan gains and by continuing to keep the currency’s fixing against the dollar stable.

“There are strong economic and political reasons for the People’s Bank of China to stay the course in the fixing,” said Tim Condon, head of Asia research in Singapore at ING, which led Bloomberg’s first-quarter rankings for predicting the region’s currencies. “That, and a soft U.S. dollar against the majors, will allow Asian currencies to perform.”

The gains in everything from Malaysia’s ringgit to the Taiwanese dollar are reminding investors of the relative strength of many Asian economies even as China struggles with the slowest growth since the 1990s. The 10 Asian economies covered are forecast by analysts in separate surveys to expand 4 percent this year, more than twice the pace of major developed nations. And that’s after China’s efforts to weaken the yuan fixing in January roiled world markets, at one point wiping $9 trillion off the value of global stocks.

Bulls Vs Bears

ING sees eight of 10 of the region’s exchange rates appreciating versus the dollar through this year. Second-placed CBA predicts all 10 will. That’s in contrast to the median estimates of analysts surveyed by Bloomberg, which envisage declines in every currency by year-end.

A more dovish Federal Reserve will help the Asian currencies, as will “cheaper” valuations for the Korean won and Malaysian ringgit after big drops over the past few years, CBA said.

The Bloomberg-JPMorgan Asia Dollar Index, which tracks the region’s 10 major currencies excluding the yen, rose 1.9 percent in the first three months of this year, after dropping 8.3 percent over the previous six quarters. The ringgit led gains, climbing 10 percent, followed by a 5.2 percent advance in the Singapore dollar and 4 percent for Indonesia’s rupiah.

Malaysian Controversy

ING’s Condon sees the ringgit strengthening 6.8 percent from current levels by the end of the year. The currency, which plunged 19 percent in 2015, was oversold amid allegations of wrongdoing surrounding state-investment company 1Malaysia Development Bhd. and Prime Minister Najib Razak, he said. The Dutch lender forecasts gains of 1.7 percent in Thailand’s baht and 0.6 percent in South Korea’s won.

CBA predicts the won will outperform the rest of the region this year to strengthen 9.2 percent. It sees gains of 5.4 percent in India’s rupee and 5.1 percent in the ringgit.

Given the Fed’s dovish turn, futures traders are pricing in at most one interest-rate increase this year, less than the four that officials signaled in December. U.S. policy makers have since scaled back their estimates to two moves. That has pushed a gauge of the dollar versus its major peers down by 4.4 percent in 2016.

‘Drifting Lower’

“We see the U.S. dollar drifting lower into the end of the year and Asia’s current-account surpluses generating Asian currency strength,” said Richard Grace, chief currency and rates strategist at CBA in Sydney. “We believe the yuan will strengthen further. Most of the bad news is priced into China’s economy.”

CBA predicts a 2.7 percent gain in the yuan by the end of the year, while ING sees it little changed. ABN Amro Bank NV, the third-most accurate forecaster in Bloomberg’s rankings, projects a 3.4 percent drop.

The yen’s resurgence against the dollar should also benefit its Asian peers, said Charlie Chan, a former Credit Suisse Group AG proprietary trader whose hedge fund profited from the Japanese currency’s slump in 2014. The yen has appreciated 5.4 percent in the past month, the most in Asia, easing pressure on other nations in the region to maintain currency competitiveness.

The PBOC’s fixing for the yuan on Monday was 0.4 percent stronger against the dollar than on Dec. 31. Foreign-exchange reserves unexpectedly rose by $10.3 billion in March after falling by $323 billion over the previous four months, which may help the currency maintain those increases. The “more stable” fixings have been instrumental in curbing capital flight and restoring confidence, said ING’s Condon.

Pursuing Weakness

Australia & New Zealand Banking Group Ltd. is less optimistic.

It points out that the PBOC’s appetite for trade-weighted weakness in the yuan appears to be increasing. A Bloomberg replica of the CFETS RMB Index, which tracks the yuan against 13 exchange rates, is down 3.4 percent this year. If it keeps falling, it may raise concern about how far China is willing to let the yuan weaken -- particularly against the currencies of its neighbors, said Khoon Goh, a senior foreign-exchange strategist at the bank in Singapore.

ABN Amro sees six of the seven emerging-market Asian currencies it covers falling by the end of the year. It predicts that only Thailand’s baht will advance, though it doesn’t follow the ringgit, Philippine peso or Hong Kong dollar.

The Dutch lender is still more optimistic than the median estimates in Bloomberg surveys, which foresee declines of 0.1 percent to 7.1 percent in the 10 regional exchange rates.

“The main reason we are less bearish on Asian currencies” is that we don’t expect the Fed to raise rates this year, said Roy Teo, a senior currency strategist at ABN Amro in Singapore. “Euro and yen weakness will be more modest, hence giving some support to Asian currencies.”

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