International | Jan 15 2007
By Chris Shaw
In the mid-1980s the Asian region enjoyed a very strong period of growth as the Japanese currency strengthened against the US dollar, dragging other currencies in the region higher with it and boosting share and property prices.
Macquarie suggests Asia is now in the early stages of another such long-term period of outperformance, this time being driven by structural issues and led by China. The broker notes the Chinese currency has appreciated by about 5% against the US dollar since July of 2005, but even if it strengthened a further 10-15% by the end of 2008 it would not fully eliminate its undervaluation against the US dollar.
It would also not meaningfully reduce China’s huge current account surplus, which currently stands at around 10% of GDP. Given this situation the broker expects currencies throughout the region to move higher against the US dollar, though short-term it sees Asian forex rates as moving sideways while the global economic cycle bottoms in the current quarter before rebounding in the June quarter led by stronger economies in both Japan and the US.
While such a view is a positive for the region overall it presents problems for individual countries, particularly as some currencies have appreciated more rapidly than others, so placing such nations at a disadvantage.
The broker points to Thailand as one example, as recent strength in its currency has seen the government introduce capital controls that were very poorly received by the market. Korea was next to concern investors by suggesting its currency was too strong, though in the broker’s view any response from its government is likely to be far milder and so better received than was the case in Thailand.
In the broker’s view investors can expect policy makers in the region to look at a number of alternatives to slow the reflation process, including higher reserve requirements, increased prudential and supervisory measures directed in particular at the property and consumer sectors, foreign exchange sterilisation and a likely increase in government funds deposited at central banks.
While this seems like a lot of possible responses, the broker’s view is not all nations in the region will be successful, the best-placed being Malaysia, Taiwan, Indonesia, the Philippines and Hong Kong as they have the greatest policy flexibility.
The broker’s conclusion is measures to stem currency strength may have some impact on some economies but the overall trend will be for stronger Asian currencies, so those with the ability to adopt a variety of policies to deal with the situation appear likely to gain the most.
