Non-Japan Asian Currencies

Forecast “At this juncture I would conclude that few central banks – including the MAS and PBoC – face overwhelming economic reasons to markedly alter the paths of their currencies via the bias of FX intervention and/or interest rate policy. There is however perhaps a case for Bank Negara Malaysia to favour a weaker or at least stable Ringgit Nominal Effective Exchange Rate (NEER) which has appreciated about 2.7% since mid-April and is currently appreciating at a monthly rate of over 1% (in the top half of its historical range). Central bank FX reserves remain modest despite their recent increase and core CPI-inflation is low by historical standards (even if headline inflation is high).” [Asian currencies keeping their head in a world losing its own, 26 May 2017]

Outcome
Between 26 May and 23 June 2017, of the nine major NJA currencies six experienced even smaller changes in their NEERs than they had done in the prior month. In particular, the INR, Indonesian Rupiah (IDR) and Singapore Dollar (SGD) were broadly unchanged. The MYR NEER weakened 0.5% following a 1.1% gain in the previous month.


Forecast “Conversely, if either the INR or IDR were under appreciation pressure, I would see scope for both Bank Indonesia (BI) and the Reserve Bank of India (RBI) to intervene in the FX market to temper currency appreciation and build up FX reserves. In Korea […] the recent weakness in exports and narrowing of the trade surplus point to Bank of Korea (BoK) being willing to tolerate modest and/or temporary currency weakness.” [What will Asian central banks do?, 8 November 2016]

Outcome
IDR was under appreciation pressure in December and IDR NEER rose 1.6%. But BI likely intervened in FX market to slow currency appreciation, with its FX reserves rising about $5bn or 5% (adjusting for estimated FX-valuation effects). Conversely BoK allowed the KRW NEER to depreciate about 2% in December with no material evidence of central bank FX intervention during that period (the $-value of Bank of Korea’s FX reserves was broadly unchanged).


Forecast “After a rally in October (2015), the pace of appreciation of NJA currencies is likely to slow with currencies eventually weakening modestly. The drivers include seasonality of current account flows, the ebb and flows of capital attracted/repelled by valuations and central banks’ management of their currencies.” [History points to Asian FX rally fizzling out, 30 October 2015]

Outcome
A GDP-weighted basket of NJA nominal effective exchange rates appreciated modestly in November 2015, before weakening modestly in December. Against the USD, NJA currencies started to gradually weaken from 30 October (publication date) until mid-January 2016.


Forecast “I maintain my view that higher yields in the west and tepid capital inflows into NJA […] and soft NJA exports are likely to cap the magnitude of this currency rebound. Moreover, with Asian inflation at record lows, central bank officials have a decent incentive to put a break on any prolonged and/or rapid currency appreciation. This may not present FX market participants with many exciting directional trading opportunities.” [Asian currencies’ mini comeback – Fizzle, not fireworks, 27 May 2015]

Outcome
A GDP-weighted basket of NJA nominal effective exchange rates was broadly stable over the following 6 weeks, showing a degree of immunity to market concerns about Greece, global growth and Fed policy tightening.


Forecast “Precedent suggests that outside of periods of major financial shocks, bouts of currency depreciation in Non-Japan Asia (NJA) currencies are reasonably shallow and short-lived and typically followed by similarly shallow and short-lived bouts of currency appreciation […]. Moreover, I expect NJA central banks to be biased towards stability in their currencies, or even modest and slow appreciation, in coming weeks.” [Asian currencies still on the straight and narrow, 15 May 2015]

Outcome
A GDP-weighted basket of NJA nominal effective exchange rates appreciated 2% (including CNY) and 0.6% (excluding CNY) in second half of May 2015.