Emerging market currencies are not moving as a bloc any more, and investors are rightly taking a more differentiated view of the regional FX market. But there are too many moving parts to this story to have a clear view of the way things will pan out. Things are better than they were, but this could change sharply, and in either direction with little notice.
Executive summary
A month ago, contagion from the global emerging market turmoil was roiling Asian FX markets. But even though, emerging markets aren’t exactly a sea of calm, given what is happening to US stock markets, they are more stable than they were. The Chinese renminbi has held firm below USD/CNY 7.0, though how it’ll be able to maintain that is the big question. The consensus seems to be shifting to this being broken in due course, but exactly when and by how much remains unclear. Not imminently, and not by much is the current received wisdom.
But the backdrop for the region remains a hugely complicated one. The future direction of the USD is far from clear. Strong US economic growth and rate policy, on the one hand, threaten Asian FX with further weakness. US twin deficits, an uncertain equity market outlook and changing rate cycles in the Eurozone and Japan offer a different path. Oil prices continue to pose problems for Asia’s externally challenged economies, and those with inflation problems though should be helping Malaysia’s ringgit. And the trade war is only going to get worse, not better.
Differences in central bank activity are also important. Markets have rewarded some central banks for proactivity and credibility. The Bank of Korea may be trying to get a bit of that action with its recent hawkish comments, but we think there are more finessed approaches to their problems than rate hikes. Though, they might still provide some near-term support to the Korean won.
Then there is the Thai baht, which has moved from the regional outperformer to underperformer – potentially, and only because it doesn’t have to hike rates. And finally, the Indian rupee, which looks to be on a path to free-fall after the Reserve Bank of India’s surprise inaction at the last meeting.
All told, there are too many moving parts to this story to have a clear view of the way things will pan out going forward. Things are better than they were, but this could change, sharply, and in either direction with little notice.
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