Yuan decouples from Asian peers as two-speed recovery takes hold
COUNTING on China as an anchor of strength has been a good tactic for traders of Asia’s emerging currencies. That link is losing traction as recovery paths from the coronavirus pandemic diverge.
While China’s economy has bounced back from the coronavirus crisis, as shown by data such as retail sales and industrial production, countries including Indonesia and the Philippines are still grappling with rising outbreaks. The 30- day correlation between the offshore yuan and six regional counterparts has declined in the past week as the Chinese currency climbed to the strongest level in more than a year.
Asia’s two-speed recovery is making it difficult to predict the fortunes of the region’s exchange rates amid mounting headwinds ranging from US-China tensions to the American presidential election. The Asian Development Bank expects China to avoid an economic contraction this year, while developing nations in the region as a whole will see their economies shrink for the first time since the early
1960s.
“Given that much of the strength in the yuan is related to China’s economic resilience, which has not been replicated in much of the rest of the Asia, this suggests that yuan appreciation is going to continue to have a less pronounced impact on Asian currencies,” said Mitul Kotecha, a senior emerging-markets strategist at TD Securities in Singapore. “Idiosyncratic factors have become more important for regional currencies.”
China’s gathering economic recovery has seen the offshore yuan strengthen 3.6% this quarter, beating all its developing Asian peers. The Malaysian ringgit is in second place, having gained almost 3%, while the currencies of Thailand and Indonesia, facing some of the largest economic challenges from the pandemic, have weakened.
The uneven nature of Asia’s recovery will generally be reflected in currency performance, according to Khoon Goh, head of Asia research at Australia & New Zealand Banking Group Ltd. in Singapore, who recently raised his year- end forecast for the onshore yuan to 6.7 per dollar from 6.85. —