ASIAN currencies can be tricky for an investor to navigate. They have long been seen as a tangled web of fixed, floating and managed exchange rates. On top of that, political risk abounds. Some investors were caught off guard after a coup in Thailand in 2008 caused a steep fall in the value of the baht.
But over the past 18 months the currency dynamic in Asia has changed. During this period China has effectively re-pegged its currency to the US dollar. The steep fall in the dollar last year helped China to increase its share of the global export market, which has put other Asian exporters at a disadvantage.
The result, intriguingly, is that other currencies in the region are looking closely at following China’s lead, at least in terms of devaluing. Thailand, South Korea, Japan and Vietnam all rely on exports for a large chunk of their GDP, and their need to keep up with the regional powerhouse means that some analysts suspect that we might see a bout of “competitive devaluation” of currencies across the region, where countries weaken their currencies so that they can improve the attractiveness of their exports.
It’s easy to see why Asia’s exporters are struggling to keep up with China. In the past year the South Korean won has appreciated nearly 30 per cent against the US dollar, the Thai baht has risen nearly 10 per cent and the Taiwanese dollar has appreciated by 8 per cent. The yen has also appreciated nearly 8 per cent against the dollar since March last year. This compares with the renminbi, which has been flat against the dollar for the past year.
Some countries have already taken action. At the end of last year Vietnam devalued its currency, the dong, by more than 5 per cent and it is expected to de-value further this year. That has put pressure on Thailand, which produces a similar mix of goods for export.
It’s no surprise that the forex markets have been buzzing with rumours that authorities in Thailand, South Korea and Taiwan will intervene in the markets to weaken their currencies.
While some may resort to talking down their currencies, Yoo-Na Park, currency strategist for Commerzbank, says that it is unlikely that other Asian currencies will follow China or Vietnam’s extreme examples: “They would like to try and keep their currencies weak or at least stable, but I don’t think they will adopt drastic measures like a peg” or a devaluation.
Mark O’Sullivan, a forex dealer for Currencies Direct, expects all South East Asian countries to keep their currencies weak for the foreseeable future because of their reliance on exports and the fragile nature of the global economic recovery, and he also thinks that the Japanese authorities could intervene to weaken the yen.
Tangled? Well, maybe a little. But if you are looking for direction, then keep an eye on the region’s big-hitter. “If China allows the renminbi to appreciate then neighbouring countries could start to relax,” says Commerzbank’s Park.
In the longer-term, the Asian currency dynamic could shift, thinks Mark O’Sullivan, as trade between Asian nations increases. This would mean less pressure to keep currencies low and more re-alignment between the region’s economies.