By Andrew Freris (Senior Investment Strategist ASIA, BNP Paribas)
* Expect nearly all Asian currencies to appreciate versus the dollar till year-end 2010 and beyond
* The renminbi will rise, at best, very modestly versus the dollar, the rest is politics
* Stronger Asian currencies will partially insulate the economies from the cost of higher food
On a year-to-date basis, the best performer is the Malaysian ringgit (11 percent) followed by the Thai baht (9.5 percent) the Singapore dollar (6.6 percent) all the way to the U.S. dollar pegged Hong Kong dollar which theoretically has a very limited range to move (7.75 - 7.85 percent).
The renminbi has moved very modestly by 2 percent and on the basis of non-deliverable forward (NDF) may move another 1.8 percent during the next 12 months.
The reasons for this strengthening trend are various:
-- Strong external balances both in terms of trade and current account surpluses as registered in the broadly continuing accumulation of forex reserves in the region. Exports growth is strong even in the cases where the trend has clearly peaked
-- Strong regional growth. Although most Asian economies are now registering decelerating 2Q10 GDP growth, in absolute terms the pace is robust and will be maintained
-- Perhaps most importantly, Asian interest rate differentials versus the dollar can be expected to widen in the next 12 months. It is clear that the U.S. will not raise short-term interest rates possibly for another 12 to 18 months.
Indeed the Federal Reserve is now poised for Quantitative Easing (QE) Mrk II which will keep longer term rates and yields firmly down.
As half of the major Asian central banks are now raising official rates (India, South Korea, Taiwan, Malaysia and Thailand), the local interest rate differentials versus the dollar are widening and will keep doing so as the rest of the Asian central banks will eventually join in.
Hong Kong has no option but to follow the Fed. Singapore, which has no interest policy, has allowed the Singapore dollar instead to appreciate, the equivalent of a rate hike while China has imposed very tight credit restrictions on property lending but without hiking rates -- yet.
The writing is on the wall. For at least the next 12 months Asian rates will continue to rise with dollar short-term rates pinned to near zero thereby strengthening the local currencies
THE CASE OF THE RENMINBI
There was a return to the pressures from the U.S. for the renminbi to appreciate. The Chinese are resisting this possibly, politically-motivated initiative (U.S. Congressional elections in November) as there is no clear evidence by how much is the renminbi undervalued and if its appreciation would help at all the U.S. economy where exports in total are less than 10 percent of GDP, with exports to China representing possibly about 10 percent of that total.
The renminbi is likely to continue to rise, but at a glacial pace, versus the dollar.
(The above article is not intended to be a financial advisory. Readers must seek specific advice from experts before making investment decisions.)
