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Morgan Stanley sees 12% won drop as euro hammers Asian exports
[LONDON] When Morgan Stanley's top currency strategist visited Asia last week he told clients their fixation with the US Federal Reserve was causing them to overlook risks in Europe.
Asian currencies will weaken next year as declines in the euro, already at a seven-month low on bets the European Central Bank will step up monetary stimulus on Dec 3, acts as a drag on the region's export-driven economies, Hans Redeker, New York- based global head of foreign-exchange strategy, said in an interview in Singapore. Overseas shipments shrank in eight months this year in China, 10 months in South Korea and nine months in Taiwan. In the euro-area, September marked an eighth straight gain from year-earlier levels.
"You shouldn't underestimate the impact of the euro," Redeker said, adding that Europe has a "significant manufacturing base." Asian companies face high debt levels and excess capacity as economies reel from a slowdown in China, he said.
While Asian currencies have fallen versus the dollar in 2015, all except Malaysia's ringgit have strengthened against the euro, giving European manufacturers of cars and electronics a competitive advantage. While Goldman Sachs Group Inc. predicts emerging markets will turn the corner in 2016 after a three-year rout, it also sees declines in the currencies of China, South Korea, Taiwan and Singapore.
Hyundai Motor Co said last month weakness in the euro increased costs, contributing to a 23 per cent drop in third- quarter profit. Europe accounts for 12.5 per cent of South Korea's overseas sales and 18 per cent of China's. The 12.1 per cent decline in Taiwan's exports to Europe this year has outpaced the 9.6 per cent drop for all destinations. South Korean car imports in the 12 months through October were 68 per cent higher than in all of 2013, led by BMW AG, Volkswagen AG and Mercedes-Benz vehicles, data compiled by Bloomberg Intelligence show.
Morgan Stanley predicts the won will slump 12 per cent from Friday to 1,300 a dollar by end-2016, the Singapore dollar will drop 5.5 per cent to S$1.49 and Taiwan's dollar will weaken 9.4 per cent to NT$36. It sees the yuan declining 7.5 per cent to 6.91 and the euro retreating to draw level with the greenback. Goldman Sachs has identical projections for the won and Singapore dollar, and sees the yuan at 6.80 and Taiwan's dollar at NT$34. Their forecasts are more bearish than the median estimates of strategists surveyed by Bloomberg.
Currencies of Singapore, South Korea and Taiwan are the most sensitive to the euro, data compiled by Bloomberg show. The correlation between the euro and its Asian counterparts has increased to 0.78 in the past five years from 0.64 in the preceding period, according to Australia & New Zealand Banking Group Ltd. That indicates moves in the common currency have a bigger influence on Asian exchange rates versus the dollar. A reading of 1 means they move in lockstep.
"Generally, if the euro were to weaken, there is a need for Asian currencies to weaken as well to maintain some form of relative competitiveness," said Khoon Goh, a Singapore-based senior foreign-exchange strategist at ANZ.
While Asian currencies have retreated in the spot market in anticipation that the Fed will raise interest rates, indexes compiled by the Bank for International Settlements show they're still relatively strong in trade-weighted terms, after adjusting for inflation. A measure of the yuan is near record highs and the won is close to its strongest since 2008. While the Singapore dollar's gauge has dropped, it's at levels similar to those in 2012. Taiwan's gauge has risen, ending two years of declines.
"The currencies don't look that cheap," said Mitul Kotecha, head of Asian foreign-exchange and interest-rate strategy at Barclays Plc in Singapore. "When you look at real-effective rates, they haven't weakened significantly. That's why there's probably still more room for further depreciation. China and the Fed remain the biggest factors." A gauge of 20 developing-nation exchange rates is down almost 13 per cent in 2015, set to decline for a third year, the longest losing streak since 2002. A measure of the dollar versus six major peers has gained about 11 per cent this year and is headed for its third annual advance.
While emerging-market currencies as a whole look attractive, they could remain under pressure over the medium term as diverging monetary policies in the US, Japan and Europe boost the dollar, said Andres Garcia-Amaya, a global market strategist at JPMorgan Investment Management Inc. in New York. Any further yuan devaluation will also hurt Asian currencies, he said.
"The US dollar bull trend is going to be with us next year," Morgan Stanley's Redeker said. "Asian currency weakness will stay for the entire year."