Asia FX in 2017: Trumped by dollar strength - ANZ

Research Team at ANZ forecasts a fifth consecutive year of depreciation for Asian currencies in 2017 as rising US interest rates on the back of continued policy normalisation by the US Federal Reserve, and prospects of fiscal stimulus from a Trump administration is set to keep the USD bid.

Key Quotes

“Asian economic growth should eventually benefit from a better performing US economy. But a stronger USD and rising US yield environment tends to cause volatility in capital flows and pose a headwind to Asian currencies.”

“The 3.4% depreciation we forecast is slightly more bearish than the consensus. Given the high degree of uncertainty over the path of US economic policy, currency movements are expected to be volatile. But our view is that the USD will progressively strengthen as the US will be the only major economy that is undergoing monetary policy normalisation and fiscal expansion at the same time.”

“A larger than expected depreciation in CNY remains a risk. Although the Chinese authorities are currently maintaining a stable RMB Index, they could allow the index to resume its decline, leading to a bigger depreciation in CNY. This will spill over into other Asian currencies.”

“We are most bearish on the KRW and SGD. The real effective exchange rates of both currencies are elevated given the state of their economic cycles. A recentring of the policy band by MAS is likely in 2017.”

“INR’s and IDR’s macroeconomic fundamentals have improved such that they are less vulnerable to rising US yields compared to the taper tantrum period. But with both countries running higher inflation rates compared to their trading partners, some nominal currency weakness can be expected, though this is compensated by their higher yield. Malaysia’s low reserve adequacy, falling current account surplus, and high foreign bond ownership leave MYR vulnerable to outflow pressures. The Philippines’ economic fundamentals are strong, but the risk of the current account slipping into deficit is a key risk for the PHP.”