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Photographer: Paul Yeung / Bloomberg
Photographer: Paul Yeung / Bloomberg
Counting on China as an anchor of strength has been a good tactic for traders in emerging Asian currencies. That link is losing traction as recovery routes from the coronavirus pandemic diverge.
While China’s economy has recovered from the Covid-19 crisis, as data such as retail sales and industrial production, countries like Indonesia and the Philippines are still grappling with rising outbreaks. The 30-day correlation between the offshore yuan and six regional counterparts has declined in the past week as the Chinese currency rose to the strongest level in more than a year.
People walk past stores in a commercial area in Beijing on September 20.
Photographer: Yan Cong / Bloomberg
Asia’s two-speed recovery makes it difficult to predict the fate of the region’s exchange rates amid mounting headwinds from the US-China tensions to the US presidential elections. The Asian Development Bank expects China to will avoid an economic contraction this year, while the developing nations of the region as a whole will see their economies contract for the first time since the early 1960s.
“Since much of the yuan’s strength is related to China’s economic resilience, which has not been replicated in much of the rest of Asia, this suggests that the yuan’s appreciation will continue to have a less pronounced impact on Asian currencies, ”Said Mitul Kotecha, senior emerging markets strategist at TD Securities in Singapore. “Idiosyncratic factors have become more important for regional currencies.”
China’s growing economic recovery has seen the offshore yuan strengthen 3.6% this quarter, outperforming all of its developing Asian peers. The Malaysian ringgit is in second place, having gained nearly 3%, while the currencies of Thailand and Indonesia, which face some of the biggest economic challenges from the pandemic, have weakened.
Relationship problems
Correlations with emerging Asian currencies decline as the yuan strengthens
Source: Bloomberg
The uneven nature of Asia’s recovery will generally be reflected in the performance of the currency, according to Khoon Goh, head of Asia research at Australia & New Zealand Banking Group Ltd. in Singapore, who recently raised his year-end forecast for the yuan on land at 6.7 percent. dollar from 6.85.
“I see that the trend will continue, probably in the second half of next year, and it will depend on the success of any vaccine rollouts or the countries that succeed in reducing the national outbreak,” Goh said. “These will be key for the laggards to catch up.”
The yuan was trading at 6.8197 to the dollar on Thursday after appreciating to 6.7501 on September 17, the strongest since April 2019. While the currency has retreated from its highs after weaker-than-expected adjustments In recent days, the biggest three-month gain since March 2018 is still on track.
Read more: China brakes the big Yuan rally with another weaker arrangement
Key exchange rates to watch for signs of a break in the correlation with the yuan may be the ringgit, the South Korean won, and the Taiwan and Singapore dollars. A 1% movement in the Chinese currency has previously led to an average change of 0.6% in these four currencies, according to a Bloomberg analysis.
While the yuan’s correlation with other emerging Asian currencies appears to be breaking down, its relationship with those of the Group of 10 countries appears to be growing. The Chinese currency is they increasingly influence weekly price changes in the pound and in commodity-linked currencies such as the Australian, New Zealand and Canadian dollars, according to HSBC Holdings Plc.
Internal risks are likely to prevent emerging Asian currencies from keeping up with the yuan, even as the strength of the Chinese currency and a weaker dollar create a favorable environment, said Terence Wu, currency strategist at Oversea-Chinese Banking Corp. in Singapore.
Weak exports will likely dampen sentiment toward the won, while debt monetization concerns weigh on the Indonesian rupiah, and the rupiah will be hit by the worsening virus outbreak in India, he said.
“The macro recovery in the rest of Asia has been choppy and uncertain at best, and there is also no strong momentum from portfolio inflows,” Wu said. “These factors will put the rest of the Asian currencies behind.”
– With the assistance of Simon Flint and Sanjit Das
(Update the prices in the fifth and eighth paragraphs.)
