Best Asian FX Forecaster Fears Trump Risk More Than China: Q&A

Is China’s Epic Short Squeeze a Return to 2016?

Standard Chartered Plc sees China as less of a threat to Asian exchange rates this year as rising U.S. borrowing costs and uncertainty over President-elect Donald Trump’s trade policies take center stage.

The U.K. bank, the most-accurate Asian currency forecaster in Bloomberg rankings, sees the region’s exchange rates struggling in 2017 as the 10-year U.S. yield could soar as high as 3 percent in the third quarter. As yields stabilize in the final three months of 2017, currencies will be able to rally amid an improvement in the global economy, said Robert Minikin, Standard Chartered’s London-based head of Asian currency strategy.

The lender is recommending clients to take overweight positions on the Indian rupee versus the dollar and underweight the currencies of Taiwan and Singapore against the greenback.

It forecasts the rupee will weaken 1.2 percent from Tuesday’s close to 69 a dollar by year-end, while a median estimate of a Bloomberg survey of analysts estimates the total return from holding the rupee, including interest income, will be at 5.5 percent. The ringgit could weaken to 4.60 by the end of June from 4.475 on Tuesday before strengthening to 4.40 by the end of 2017, according to the bank.

Below are questions and answers from an interview with Minikin:

1) What are the biggest risks for Asian currencies this year?

“Over the past 18 months or two years, it’s been sort of a balance between surprises and sort of shocks from Asia, China in particular, and from the U.S. Going forward, we think that a lot of the surprise will come from the U.S. side. It’s down to the Fed, it’s really down to the Trump presidency rather than the news in Asia.

“We’ve got a strong view that there will be no abrupt step lower in the value of the Chinese currency. We take the view that the authorities are well placed to deliver stability in the Chinese currency. But that stability is from a basket perspective, not a peg against the U.S. dollar.

“A devaluation of the Chinese currency is not warranted at this point. It’s a very bad time to embark on FX weakness as we start the Trump presidency.” China’s bilateral trade surplus with the U.S. is wider now prior to the global financial crisis, he said.

China’s “approach is more proactive than reactive. We’ve seen these recent steps to tighten liquidity conditions in Hong Kong to underpin the Chinese currency. They’ve got a better grip now on FX policy. This improvement that we’ve seen in China will be reassuring for the rest of Asia.”

2) Which Asian currencies will outperform?

“Carry still plays a role in driving total returns for currencies like the Indian rupee: we can see outperformance relative to the forwards. The rupee we have as a single overweight for the year and that partly reflects healthy external balances . Overall, we take the view that the policy steps that have been taken are broadly heading in the right direction.”

“Foreigners only own a small share of the onshore debt market for India, whilst for Indonesia and Malaysia overseas investors are very important.” Indonesia’s rupiah and Malaysian ringgit would be more heavily influenced by U.S. Treasury yield developments, said Minikin.

“I would stress that once U.S. Treasury yields are beginning to consolidate, then at that point a little later in the year, likely in the second half of the year, we will become more constructive again on the rupiah and the ringgit. Ultimately, the fundamentals are pretty sound. It’s just the global environment is causing problems for those currencies.”

3) Why are you underweight on some Asian currencies?

“In terms of the currencies that are most vulnerable, ultimately, it’s not that Asian currencies are going to be weak, but some of them just tend to be highly correlated with the U.S. dollar and dollar-yen. We pick out the Singapore dollar and the Taiwanese dollar.”

4) Why do you think Asian currencies will do better in the fourth quarter?

“Cyclical indicators for Asia appear to be improving. For example, we had Taiwanese exports. You saw they were ahead of expectations.”

“The big conclusion from analyzing Asian currencies is that they tend to trade pro-cyclically. When global trade improves and the global economy is doing better Asian currencies do better. That’s an important supportive factor for the complex, even as we see higher U.S. yields.”

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