RISK MANAGEMENT

Forecasting the Yen, Yuan, Rupee, Rupiah, HKD, SGD and Other Asian Currencies

  • Asian currencies have generally depreciated significantly versus the US dollar since mid-2014. Looking ahead, we expect them to weaken further through to mid-2017 amid US Fed interest rate increases.
  • But after that, in the medium term, we forecast most Asian currencies to appreciate versus the US$ as improving economic growth attracts equity flows while, in the background, productivity-based trend appreciation of the real exchange rate (RER) takes place.

The Malaysian ringgit dropped by 3.7% through end-July amid further escalation of the 1MDB scandal. The yen rose by 4.6% due to its safe-haven status. Most other Asian currencies weakened slightly against the dollar

  • To assess likely long-term developments, we employ two benchmarks to look at where Asian exchange rates are compared to their ‘equilibrium’ exchange rate. In the spirit of the Macro Balance approach, our current-account projections suggest the Korean won, Thai baht and, especially, the Taiwan dollar and Singapore dollar are undervalued.
  • A long-term anchor that we find useful, especially for emerging markets, is the comparison of price levels, as prices tend to rise as economies catch up in terms of productivity and income. This framework suggests that, after having been hugely overvalued in the 1990s, Japan’s real exchange rate has come down and the yen is now closer to fair value.
  • The won seems to be priced attractively now, while the Hong Kong dollar and, especially, the Singapore dollar seem remarkably cheap on this comparison-of-price-levels measure, although this may change.
  •  While the Chinese yuan is still attractively priced in a global context, that is not true compared to some regional competitors. Price-wise, the Indian rupee is now valued attractively, compared to the CNY when China was at the stage of development that India is now.
  • Among the Philippine peso, Indonesian rupiah, Malaysian ringgit and the Thai baht, the PHP seems to be on the expensive side, taking into account levels of development, possibly because of the stream of migrant remittances. The ringgit seems particularly cheap.
  • Trend-wise, Asian real exchange rates should generally continue to appreciate in the coming decade, although in some cases intra-regional competition may prevent the kind of appreciation that seems warranted by global standards.

Recent developments

Asian exchange rates depreciated significantly versus the US dollar between end-July 2014 and end-January 2016. The weakening ranged from 2.9% in Vietnam and 6.1% in China to 23.9% in Australia, with most Asian currencies falling 10-15% versus the US$.

This was in a context of a globally strengthening US dollar and downward pressure on emerging markets asset prices. The US dollar’s nominal effective exchange rate (NEER) rose an impressive 22.5% in this period. On average, most Asian currencies actually depreciated less against the US dollar than did the currencies of US trading partners.  

Between end-January and end-April of this year, Asian currencies generally recovered some ground as the US dollar softened globally amid another revision of the outlook for growth and monetary policy in the US, even as appetite for emerging markets assets recovered.

Since end-April, FX markets have had to absorb depreciation of the CNY, another strengthening of the US dollar globally, and Brexit. However, the response of Asian currencies varied.

The Malaysian ringgit dropped by 3.7% through end-July amid further escalation of the 1MDB scandal. The yen rose by 4.6% due to its safe-haven status. Most other Asian currencies weakened slightly against the dollar, although the Korean won, Taiwan dollar and Indian rupee picked up somewhat – possibly because of somewhat better Asian export trends, but also probably in response to the stronger yen.

Overall, the largest swings were experienced by the ‘commodity currencies’ such as the Malaysian ringgit, Australian dollar and Indonesia rupiah, as well as the yen – the last had already depreciated substantially since September 2012, when Abenomics was launched.

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