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Currency wars defused by China as yuan rally spreads across Asia

Wednesday, April 29, 2015 - 07:22
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China is helping its Asian neighbours stay out of the global currency wars.

[SINGAPORE] China is helping its Asian neighbours stay out of the global currency wars.

Policy makers in the world's biggest exporter have resisted weakening the yuan as economic growth slows, seeing exchange- rate stability as key to winning global reserve-currency status from the International Monetary Fund this year. That in turn has reduced pressure on China's regional export rivals to keep their products competitive with weaker exchange rates, according to BlackRock Inc, the world's largest money manager.

"We don't expect a large depreciation of the yuan," Joel Kim, the head of Asia-Pacific fixed income at BlackRock, which oversees US$4.77 trillion, said in an April 21 e-mail interview.

He predicts Asian currencies will outperform peers in other emerging markets. "If they would do something like that, for the rest of Asia and the rest of the world it would obviously set off another round of competitive devaluation."

Foreign-exchange traders have started to take notice. The Bloomberg JPMorgan Asia Dollar Index has strengthened 2.2 per cent from an almost five-year low on March 13, its biggest gain in 18 months, while the average cost of options to sell nine Asian currencies against the dollar dropped to the lowest since Dec 3 versus bullish contracts.

ABN Amro Bank NV, the most accurate forecaster of Asian currencies for three straight quarters, raised its June targets for the yuan, Taiwan dollar and South Korean won last week.

The latter two economies, along with Singapore, have the highest export exposure to China among Asian peers, according to Roy Teo, a Singapore-based strategist at ABN Amro. He raised his June forecast for the won by 1.8 per cent to 1,100 per dollar, while increasing predictions for the yuan and the Taiwan dollar by 0.8 per cent and 1.3 per cent, respectively.

China's currency will probably end the year at 6.20 a dollar, versus 6.2057 on Tuesday, according to the median of 37 analyst estimates compiled by Bloomberg.

The yuan depreciated in the first two months of 2015 as traders speculated the People's Bank of China would follow peers from Europe to Australia in using weaker exchange rates to support growth. The rebound began on March 3 after PBOC Deputy Governor Yi Gang said the currency "will remain very stable in the future."

Premier Li Keqiang drove the point home two days later by saying in a report to lawmakers that the exchange rate will be kept at a reasonable and balanced level. While eschewing currency weakness, policy makers have relied on interest rate cuts and reduced reserve requirements at banks to bolster economic growth.

The Chinese government has been pressing the IMF to include the yuan in its Special Drawing Rights basket, a key endorsement for reserve-currency status, as authorities challenge the hegemony of the dollar and a global economic order dominated by the US and Europe. The Washington-based lender's board will conduct a twice-a-decade review of SDRs in October.

The yuan has rallied 1.1 per cent in Shanghai from its March low, while Taiwan's dollar climbed 2.7 per cent and Singapore's currency advanced 3 per cent. The won gained 2.5 per cent.

There's still scope for the yuan and its peers to weaken against the dollar when the US Federal Reserve raises interest rates later this year, according to ABN's Teo. He kept his end-2015 estimates unchanged at 6.35 for the yuan and NTUS$32.10 for Taiwan's dollar, or 4 per cent weaker than Tuesday's level.

"Relative yuan stability won't completely keep Asian currencies from weakening against the dollar, but it does help ameliorate the degree of weakness in others," Sacha Tihanyi, a Hong Kong-based senior currency strategist for emerging Asia at Scotiabank, ranked fourth among forecasters tracked by Bloomberg, said in an e-mail interview Tuesday.

Options Shift For the next three months, the options market is signaling greater resilience for Asian currencies.

The premium on contracts giving the right to sell the yuan versus those to buy has dropped to 1.1 from a six-year high of 3.3 on Feb. 19. The average gap for all nine Asian currencies tracked by Bloomberg has declined 0.4 per centage points to 1.52.

The yuan has been a source of stability in Asia during past crises when the dollar surged. It appreciated 7 per cent during the global financial crisis in 2008 and rose 0.2 per cent over 1997 and 1998, when South Korea, Thailand, Indonesia and the Philippines were forced to devalue and seek IMF bailouts.

Exports to China account for an estimated 23 per cent of gross domestic product in Taiwan, 16 per cent in Singapore and 11 per cent in South Korea, according to ABN Amro.

"A stable yuan helps everybody," Dennis Lim, a director of emerging markets research in Singapore at Franklin Templeton Investments, which oversees US$880.6 billion, said in an April 28 interview. "There would be so much certainty for manufacturers as they can plan ahead. That's going to help the Koreans and Taiwanese."

BLOOMBERG

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