FYI | May 07 2008
By Chris Shaw
While Westpac suggests the US dollar is likely to weaken further over the next 6-12 months (see “Westpac Still Sees AUD At Parity With USD”, FYI, 7/5/08) Danske Bank takes the view the multi-year downtrend against the euro may in fact be coming to an end.
If this proves to be the case there are implications for emerging market currencies, as the bank notes some of these currencies are inclined to follow the lead of the greenback while others tend to move in the opposite direction.
Geographically the split is roughly along the lines of the eastern European currencies following the euro, meaning currencies such as the Polish zloty and the Czech koruna may be set for a period of underperformance if the bank is right in its view the US dollar will gain on the euro.
Conversely Asian and Latin American currencies and some other emerging markets tend to follow the US dollar, so outperformance relative to the euro can be expected for currencies such as the Chinese renminbi, the Russian rouble and currencies in the Gulf region.
As the bank notes many of these currencies have been under pressure to revalue as the US dollar has weakened, so any turnaround in the US currency would likely relieve that pressure somewhat. Even allowing for a reduction in these pressures the bank still expects these currencies to perform well if in fact the US dollar does strengthen.
What stands the Asian currencies in good stead for gains in line with the dollar is the bank’s view they are undervalued, especially given the current account surpluses and limited public sector finance requirements in the region.
Not all the Asian currencies are expected to gain though, as for example the bank notes the Korean economy is struggling with higher oil prices and more expensive commodity imports generally and the Philippines is dealing with higher food prices, so neither of these currencies have particularly bullish outlooks.
