Asia’s en­cour­ag­ing cur­rency sta­bil­ity

Financial Mirror (Cyprus) - - FRONT PAGE - Mar­cuard’s Mar­ket up­date by GaveKal Drago­nomics

Three months ago to the day, the US Fed­eral Re­serve ended its out­right pur­chases of trea­suries. Three months be­fore that, the ECB in­sti­tuted neg­a­tive in­ter­est rates. And whether by co­in­ci­dence or cau­sa­tion, most com­mod­ity prices chose the past six months to un­ravel.

The com­bi­na­tion of th­ese events has led to some sharp ex­change rate moves. Over the past three months, com­mod­ity cur­ren­cies have been taken to the wood­shed: the Rus­sian ru­ble is down -37%, the Nor­we­gian krone is down - 15%, and the Aus­tralian and Canadian dol­lars have each shed -11%. Mean­while, the euro and its neigh­bours (Dan­ish krone, Swedish krona, Pol­ish zloty, Hungarian forint) are all down by -11% to -12%. And of course, the Swiss Franc made a never-be­fore-seen one-day dou­ble digit gain against ev­ery other cur­rency out there.

Amid the tur­moil, Asian cur­ren­cies have been is­lands of rel­a­tive sta­bil­ity. In the last three months, the Philip­pine peso has risen by +1.3% against the US dollar. The In­dian ru­pee and Thai baht are flat. The ren­minbi and Tai­wan dollar are down -2.5%. Even the Ja­panese yen-ev­ery macro in­vestor’s favourite short af­ter the Bank of Ja­pan’s Oc­to­ber sur­prise-is down only -8%, and has ba­si­cally been flat since mid-Novem­ber. From this cur­rency sta­bil­ity we draw the fol­low­ing con­clu­sions:

* In 2014, the main story in the mar­ket was the strength of the US dollar. Start­ing in mid-Novem­ber, the nar­ra­tive started to shift from US dollar strength to euro weak­ness. This is im­por­tant be­cause the mar­ket’s be­hav­iour in past few days fol­low­ing the Euro­pean Cen­tral Bank’s an­nounce­ment of quan­ti­ta­tive eas­ing raises the pos­si­bil­ity that, once again, in­vestors might have opted to ‘buy the ECB ru­mour, sell the fact’. Com­bine this with the re­cent un­der­per­for­mance of US eq­ui­ties, and per­haps the over­all gains in the US dollar will now take a breather.

* One of the ques­tions clients have asked most fre­quently over re­cent months is: When will the ren­minbi join other cur­ren­cies-like the Sin­ga­pore dollar last week-and de­value against the US dollar? But, if a) most Asian cur­ren­cies are now sta­ble against the US dollar, and b) the US dollar stops ap­pre­ci­at­ing, should we be that con­cerned about ren­minbi weak­ness? In re­cent months, we have ar­gued at length that Bei­jing needs its cur­rency to be strong, at least against those of its neigh­bours, to fur­ther its long term geostrate­gic and fi­nan­cial re­form goals. We still be­lieve this to be the case and see short term pull­backs, such as the one that has un­folded in re­cent days, as a buy­ing op­por­tu­nity.

* The sta­bil­ity of Asia’s cur­ren­cies makes the re­gion all the more at­trac­tive both for do­mes­tic and for­eign in­vestors. Mean­while, the greater cur­rency volatil­ity in Europe and other emerg­ing mar­kets mas­sively in­creases the risk, and stress, for in­vestors look­ing to deploy cap­i­tal in ei­ther. At the mar­gin, Asia’s cur­rency sta­bil­ity should thus lead to a rerat­ing of re­gional eq­ui­ties and bonds, rel­a­tive to Euro­pean and US eq­ui­ties. In fact, given the rel­a­tive sta­bil­ity of Asian cur­ren­cies and the re­gion’s gen­er­ally pos­i­tive eco­nomic out­look, it makes lit­tle sense that Asian eq­ui­ties should cur­rently be sport­ing the low­est P/E ra­tios in the world.

* The sta­bil­ity of Asian cur­ren­cies is very pos­i­tive for re­gional, and thus global, trade flows. Rapidly shift­ing cur­rency val­ues are highly dis­rup­tive for es­tab­lished trade links (as the Asian cri­sis of 1997-98 demon­strated). How­ever, the fact that Asian coun­tries do not seem to be fol­low­ing the lead set by oth­ers and are not play­ing the ‘cur­rency war’ games is greatly en­cour­ag­ing for re­gional trade.

Putting all th­ese points to­gether, we take heart from the pass­able per­for­mance of Asian cur­ren­cies over re­cent weeks. Ad­mit­tedly, there have been spots of weak­ness: the Malaysian ring­git has had a tough few months (Malaysia is also the only Asian bond mar­ket to have de­liv­ered no gains over the past three months), as have the Aus­tralian and New Zealand dol­lars. But the pull-backs make sense given the im­por­tance of com­mod­ity ex­trac­tion to th­ese economies. And as the ring­git strug­gles, it makes sense for the Sin­ga­pore dollar to soften some­what in sym­pa­thy. But apart from th­ese few cases, the pic­ture that emerges from Asia is largely one of sta­bil­ity.

This rel­a­tive cur­rency sta­bil­ity will help the nascent Asian eq­uity bull mar­ket to grow.

In fact, with an out­look very sim­i­lar to the one at the be­gin­ning of this cen­tury, a num­ber of Asian coun­tries-In­dia, the Philip­pines, China-may well be start­ing once again to see a triple merit sce­nario of fall­ing in­ter­est rates, ris­ing cur­ren­cies, and ris­ing as­set prices.

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