Monday, February 3, 2014

Asia Currencies: Beyond the Selloff

Amid the current global emerging market selloff, it's probably worth taking the time to explain what makes Asia different from emerging markets in other parts of the world. Two examples are the Korean won and Taiwan dollar which, were sold despite record high foreign reserves on the back of strong trade and current account surpluses.

Firstly, there is no credence to the view that the Federal Reserve taper would lead to higher US bond yields and subsequently a higher US dollar. In reality, the US ten-year bond yield has been heading down, instead of up, into and after the last Fed meeting on January 29. The US ten-year bond yield retreated to 2.6440% on January 31 from 3.0282% at the end of 2013. Meanwhile, the US dollar fell from above 105 yen to 102 yen during the same period. And the Dow Jones Industrial Average has fallen more than 5% from its record high set on the last day of 2013.

This price action challenges the popular consensus view that the Fed taper would lead to higher US bond yields, reverse capital flows into US capital markets and hurt Asian currencies with wide current account deficits. In Southeast Asia, Malaysia and Thailand no longer have the same trade and current deficit problems that hurt their currencies during last year’s emerging market volatility in May to August. Even Indonesia’s current account deficit has stopped worsening and looks set to post a narrower deficit in 2014.

The Indian rupee has been fairly stable after its current account deficit narrowed swiftly to less than 2% of GDP. Despite its troubled domestic politics, Thailand’s current account balance has improved after reporting its worst deficit of US$4.15 billion in April. Since then, it has reversed steadily to a US$2.53 billion surplus in December, its highest level since March 2009. For now, the US dollar is facing stiff psychological resistance at 33 baht.

Similarly, Malaysia’s trade surplus recovered to more than 8.0 billion ringgit for three straight months into November. This was a far cry from the paltry 1.04 billion ringgit surplus in April that saw the Malaysian ringgit return 50% of its post-2008 crisis gains during the May-August selloff. Hence, it does not make sense for the US dollar to be marginally higher than 3.3450 ringgit high seen last August.

In the end, it is probably more important to pay attention to the stable to firmer Vietnamese dong. Vietnam was probably the first Asian country that struggled with macroeconomic imbalances. It has experienced the same current account deficit woes, weaker foreign reserves and high inflation seen in its neighbours in recent years. Vietnam has reversed its chronic deficits into surplus positions not seen since 2000 and 2001.