FX Update

I am still US dollar bear and the pressure gets intensify as the Fed hiking up its claim on quantitative easing. Global markets have not taking a significant change compared to ones that was reviewed last year.

My top concern for this update is EUR. There are several reasons still to sell EUR. The hairline crack in the foundation stone widens with a core story as German growth evaporates with the collapse in world trades. I still think there will be flows of bad news about financial sector in Europe, relatively speaking, than there is in the US and UK. I believe large parts of central and eastern Europe are on the cusp of synchronized currency crisis as the output gap widens very rapidly, hence that arguably that policy in the Europe has to stay that much looser for that much longer rises. This could play out partly as reserve managers, notably in Asia come to distrust the EUR foundations as a global reserve currency.

Do not be drawn into thinking that the pound somehow gets ‘rewarded’ for the pro-activity of the UK’s monetary printing policy approach. Also, still helping the greenback is a persistent global ‘bid; for it, partly as capital flows and stays home.

The yen has weakened sharply. However, risk of renewed yen downtrend look exaggerated as the international taxation reform of Japan starting April, which promotes larger repatriation of overseas profit by Japanese corporate potentially will limits yen’s downside. Unless widening losses on stocks leads to the large scale divestment overseas, the impact on the currency should be limited.

On commodity currencies, CAD, AUD & NZD have been underperformed with a loss of 3.3%, 2.2% and 4.0% in a race to zero for interest rate globally. Gone are the days where, at least for the AUD and NZD yield will be rewarded but there is a strong cyclical between emerging economies and overall commodity price baskets.

My base case for USD/CNY remains unchanged and it has continued to trade relatively steadily at 6.84 during the past month. I expect the PBOC will draw down FX reserves in defense of the currency, but a sharp drop in FX reserves is unlikely, though cannot be ruled out.

The Ringgit has finally decoupled from the CNY and is starting to buckle under pressure from slowing growth and falling commodity prices. The balance of payments position remains under stress on the back of heavy portfolio liquidation and resident capital outflows despite solid current account surpluses of 15% of GDP.

For this review, my key highlight is Korean won – the cheapest of all currencies I monitor. On a PPP basis, Won is 16% cheaper against the USD. Large under-ownership of Korea and abnormally high loan/deposit ratio for Asia (131% in Korea), it will benefit from a fall in credit spreads.