Yuan decouples from Asian peers

SINGAPORE: 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 Covid19 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 declined last week as the Chinese currency climbed to its 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 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.

China’s recovery has helped the offshore yuan strengthen 3.6% in this quarter, beating all its developing Asian peers. The Malaysian ringgit is second, 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 be reflected in currency performance, says Khoon Goh, head of Asia research at ANZ Banking Group in Singapore, who recently raised his yearend forecast for the onshore yuan to 6.70 per dollar from 6.85.

The yuan was trading at 6.8197 per dollar last Thursday after appreciating to 6.7501 on Sept 17, the strongest since April 2019.

“I see the trend continuing, probably into the second half of next year, and it will hinge on the success of any vaccine deployment or countries managing to bring the domestic outbreak down,” Mr Goh said. “These will be key for getting the laggards to catch up.”