Currencies | Nov 03 2010
By Chris Shaw
As the US moves closer to expanding its quantitative easing program, Asia has received substantial capital flows as investors seek higher yields. But these capital flows have forced central banks in Asia to either step up their forex intervention efforts or adopt some capital control measures.
Both moves have driven Asian currencies higher relative to the US dollar and Andy Ji, the Commonwealth Bank's Asian currency strategist, suggests this trend is likely to continue in coming months. To reflect this, Ji has revised his Asian currency forecasts.
In making the changes Ji accepts Asian economic growth likely peaked in the first half of 2010, as the inventory cycle is maturing and a slowing of the Chinese economy has seen some deceleration in regional export growth.
While a measured moderation in growth in the region remains likely Ji acknowledges a sharper than expected slowdown is still a possibility. This is especially the case among the more export oriented economies such as Singapore, South Korea, Taiwan and Thailand.
Asia's growth outlook is becoming more challenging but with elevating inflationary pressures, Ji expects policy normalisation will resume in 2011, so driving Asian currency strength through the year. This has caused Ji to pencil in further downside to his US dollar versus Asian currency forecasts in the near-term.
Changes are not uniform though, Ji pointing out the macroeconomic mix and relative valuations across the region means currency performance is likely to diverge significantly. As examples of this, Ji expects the Korean won (KRW) and Philippine peso (PHP) to outperform, while the Thai baht (THB) and Indonesian rupiah (IDR) should underperform given currently stretched valuations.
For the US dollar against the Chinese renminbi, Ji expects appreciation pressures will linger because the Chinese economy remains in a sweet spot. This means China's trade surplus and capital inflows should continue to widen.
Political pressure from the US is also likely to intensify in Ji's view given that economy's weak recovery, so the pace of the renminbi's appreciation appears likely to accelerate in coming months. Ji expects the USD/CNY rate will finish this year at 6.63, moving to 6.47 by the end of next June and 6.28 by the end of December 2011.
With respect to the Singapore dollar, the current strength in capital inflows and pre-emptive monetary policy moves should see this currency pair continue to trade in the upper half of the policy band in Ji's view. His forecasts call for USD/SGD rates of 1.29 at the end of December, 1.26 as at the end of next June and 1.24 as at the end of next December.
The baht is Asia's best performing currency this year but as Ji notes these gains are eroding Thailand's trade competitiveness. With more active currency intervention likely in coming months and with the currency looking expensive at present, Ji anticipates underperformance relative to regional peers in 2011. His forecasts for the USD/THB pair now stand at 29.5 for the end of this year, 30.5 at the end of June 2011 and 31.0 at the end of December 2011.
In Indonesia, Ji sees a risk of the central bank falling behind the curve with respect to rate hikes, especially given headline CPI appears to be increasing and core inflation shows no signs of weakening. This underscores Ji's neutral view on the rupiah, his USD/IDR forecasts now standing at 8,850 at the end of both December and June next year and 9,000 at the end of December next year.
Given a high terms-of-trade and an expectation of strong income and export growth Ji remains bullish on the Korean won against the greenback, especially as the currency is also undervalued at present on a real effective exchange rate basis.
The won is Ji's preferred Asia ex-Japan currency over the next 12 months and his USD/KRW forecasts now stand at 1,100 for the end of December, 1,070 as at the end of June next year and 1,050 as at the end of next December.
