Regional currencies enjoyed a fillip when the US Federal Reserve decided over a week ago to hold interest rates at close to zero for a little longer. But data out of the US is likely to continue showing that the world’s largest economy is steadily gathering pace, according to some analysts, which could revive expectations of an imminent rate hike and spur renewed strength in the US dollar.
Rohit Garg, emerging markets FX strategist at Bank of America Merrill Lynch, is expecting a firm 2Q2015 US GDP reading on Sept 25, which he believes will push the US dollar higher. “We see that the market generally isn’t pricing in a hike this year yet,” he says. But we believe that the US dollar theme is far from over with the US economy much stronger now, and that the Fed will likely be the first central bank to raise rates, likely in December.”
Meanwhile, BoAML is also expecting further weakness from China in the quarters ahead. “We expect the renminbi to devalue by another 5%-7% from now by the end of next year on slower growth,” Garg says. “Given the strong correlation between the business cycles of China and Asean, and our base case of the US hiking rates in December, this definitely means an overall weakening of all the Asean currencies from their current levels.”
Export weakness
A key concern is that Asean exports do not appear to be showing much improvement in spite of the weaker currencies across the region. One reason is weaker demand for Asean-produced commodities and finished foods from China. “What’s happening is that China is trying to move up the value chain and compete directly with export-driven countries like South Korea,” Garg explains.
In the meantime, China is also pushing for the raw materials used in the production of finished goods like electronics and machinery to be sourced domestically instead of imported from Asean. So, not only are Asean exports suffering from a drop in competitiveness as a result of the cheaper renminbi, China’s demand for those exports is also falling.
“Asean is losing out on export revenue from China. Unless we see higher fiscal spending from the governments in this region and a more meaningful deprecation of currencies to boost exports, we will see slower growth from Asean from now on,” says Garg.
Varied policy responses
Now, with weaker growth prospects and little sign of inflation, Asean central banks are likely to loosen monetary policy to support their economies. Singapore, for instance, is likely to end 2015 with an inflation rate below the Monetary Authority of Singapore’s estimate of 0.5%-1.5%, according to analysts.
Garg figures that MAS will begin steering the Singapore dollar towards a slower rate of appreciation against a trade-weighted basket of currencies. (Singapore manages monetary policy via its exchange rate). “We see the MAS either re-centring the [Singapore dollar] band, or flattening slope of the band, or both in its coming October meeting,” he says.
Meanwhile, Thailand has the option of lowering its policy rate by another 25 bps to 1.25%, which will be the lowest rate the country has ever experienced. However, Garg reckons the Bank of Thailand will only cut rates if things deteriorate further. “Thailand will probably focus on devaluing its currency instead, given that the Thai baht is still overvalued by 4%-5%,” he says.
As for Indonesia, Garg sees the authorities turning to fiscal measures. “Indonesia, which has less room to cut rates owing to its higher level of inflation, has yet to deliver on the higher infrastructure spending budget and fiscal reform that its new government has promised,” says Garg. “The Bank of Indonesia has already done all it
can to boost growth through monetary policy. Now, the onus is on the government to boost the economy through higher fiscal spending,” he adds.
Things are probably looking the least rosy in Malaysia, where foreign reserves have been dwindling and confidence ebbing on the back of the 1MDB scandal and a brewing political crisis. “In addition, China is also one of Malaysia’s biggest trading partners so slower growth will likely spill over to Malaysia at a time when oil prices are at a low,” says Garg.
The BoAML sees the ringgit weakening to RM4.28 against the US dollar by the end of next year, while the rupiah could fall to 14,800 over the same period. Meanwhile, the Singapore dollar is likely to weaken to $1.48, while the Thai baht could fall to 38 against the greenback by end 2016.
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Rohit Garg, emerging markets FX strategist at Bank of America Merrill Lynch, is expecting a firm 2Q2015 US GDP reading on Sept 25, which he believes will push the US dollar higher. “We see that the market generally isn’t pricing in a hike this year yet,” he says. But we believe that the US dollar theme is far from over with the US economy much stronger now, and that the Fed will likely be the first central bank to raise rates, likely in December.”
Meanwhile, BoAML is also expecting further weakness from China in the quarters ahead. “We expect the renminbi to devalue by another 5%-7% from now by the end of next year on slower growth,” Garg says. “Given the strong correlation between the business cycles of China and Asean, and our base case of the US hiking rates in December, this definitely means an overall weakening of all the Asean currencies from their current levels.”
Export weakness
A key concern is that Asean exports do not appear to be showing much improvement in spite of the weaker currencies across the region. One reason is weaker demand for Asean-produced commodities and finished foods from China. “What’s happening is that China is trying to move up the value chain and compete directly with export-driven countries like South Korea,” Garg explains.
In the meantime, China is also pushing for the raw materials used in the production of finished goods like electronics and machinery to be sourced domestically instead of imported from Asean. So, not only are Asean exports suffering from a drop in competitiveness as a result of the cheaper renminbi, China’s demand for those exports is also falling.
“Asean is losing out on export revenue from China. Unless we see higher fiscal spending from the governments in this region and a more meaningful deprecation of currencies to boost exports, we will see slower growth from Asean from now on,” says Garg.
Varied policy responses
Now, with weaker growth prospects and little sign of inflation, Asean central banks are likely to loosen monetary policy to support their economies. Singapore, for instance, is likely to end 2015 with an inflation rate below the Monetary Authority of Singapore’s estimate of 0.5%-1.5%, according to analysts.
Garg figures that MAS will begin steering the Singapore dollar towards a slower rate of appreciation against a trade-weighted basket of currencies. (Singapore manages monetary policy via its exchange rate). “We see the MAS either re-centring the [Singapore dollar] band, or flattening slope of the band, or both in its coming October meeting,” he says.
Meanwhile, Thailand has the option of lowering its policy rate by another 25 bps to 1.25%, which will be the lowest rate the country has ever experienced. However, Garg reckons the Bank of Thailand will only cut rates if things deteriorate further. “Thailand will probably focus on devaluing its currency instead, given that the Thai baht is still overvalued by 4%-5%,” he says.
As for Indonesia, Garg sees the authorities turning to fiscal measures. “Indonesia, which has less room to cut rates owing to its higher level of inflation, has yet to deliver on the higher infrastructure spending budget and fiscal reform that its new government has promised,” says Garg. “The Bank of Indonesia has already done all it
can to boost growth through monetary policy. Now, the onus is on the government to boost the economy through higher fiscal spending,” he adds.
Things are probably looking the least rosy in Malaysia, where foreign reserves have been dwindling and confidence ebbing on the back of the 1MDB scandal and a brewing political crisis. “In addition, China is also one of Malaysia’s biggest trading partners so slower growth will likely spill over to Malaysia at a time when oil prices are at a low,” says Garg.
The BoAML sees the ringgit weakening to RM4.28 against the US dollar by the end of next year, while the rupiah could fall to 14,800 over the same period. Meanwhile, the Singapore dollar is likely to weaken to $1.48, while the Thai baht could fall to 38 against the greenback by end 2016.
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