The devaluation of currencies in many Asian countries has attracted market attention.
On April 29, the Japanese government intervened in the foreign exchange market, causing the yen to reverse its decline and appreciate 2% against the US dollar in a single day. However, since the beginning of the year, the “collapse of the yen” has become a hot topic of discussion in the industry. The depreciation of the yen is not an exception in Asia. Many Asian emerging market currencies have continued to depreciate against the US dollar this year. Whether Asia is experiencing a new round of financial crisis is worth watching.
The depreciation of the yen accelerates
“I went on two trips to Japan this year. It's a great deal to go now!” Ah Feng, who works in Hong Kong, told reporters. He calculated an account for the reporter: at the beginning of this year, 1 Hong Kong dollar was converted to 16.2 yen; now, 1 Hong Kong dollar can be exchanged for 20 yen. Tickets for Tokyo Disney are 9,900 yen. At the beginning of the year, it was about HK$610; now it's HK$495. It's almost 20% off. The standard ticket for Hong Kong Disney is HK$639, and the Shanghai Disney ticket is $625. Ah Feng's occupation is an investment manager in a small hedge fund in Hong Kong, responsible for foreign exchange transactions. He told the reporter that investment institutions that are betting on the depreciation of the yen have been very profitable this year.
The rapid depreciation of the yen is clearly stimulating the tourism industry. According to estimates from the Japan National Tourism Organization, the number of visitors to Japan surpassed 3 million for the first time in March, the highest level in history in a single month. The data also shows that in the first quarter of this year, the total travel expenses of visitors to Japan reached 175.5 billion yen (approximately RMB 81.9 billion), a record high in a single quarter. Compared to before the pandemic, European and American tourists are growing at the fastest rate. An important factor contributing to the rapid recovery in the number of visitors to Japan was the depreciation of the yen. In 2019, before the pandemic, the exchange rate was around 110 yen per dollar, but recently it has hovered around 155 yen.
However, not everyone is happy to see the yen depreciate sharply. Japanese government officials warned that the yen depreciated too fast. Japan's Deputy Minister of Finance, Masato Kanda, once said in public that the benefits of a weak yen are diminishing. Recently, the market has fluctuated rapidly, and excessive exchange rate changes are bad for the economy.
In addition to the yen, the won is also in a rapid depreciation channel this year. The won recently rose above 1,400 against the US dollar, the first time since November 7, 2022. However, after Bank of Korea Governor Lee Chang-yong issued a warning about exchange rate fluctuations, the performance of the Korean won recently picked up. However, since the beginning of the year, the won has depreciated by more than 4% against the US dollar.
Chen Li, chief economist at Chuancai Securities, said in an interview with the Securities Times that South Korea and Japan are both developed countries and are closely linked to international financial markets. Against the backdrop of the Federal Reserve's sharp interest rate hikes many times in a row, South Korea and the Bank of Japan maintain relatively loose monetary policies. The monetary policy performance of Japan, South Korea and the US is divided, interest spreads widened, the US dollar strengthened, and depreciation pressure on the yen and the Korean won increased.
In fact, the yen, which continues to depreciate, has become the target of international capital bets.
According to the latest data released by the US Commodity Futures Trading Commission (CFTC), the total number of short positions held by hedge funds and asset management companies in yen reached 184,180 in the week ending April 23, the highest value since 2006. Meanwhile, according to transaction data released by the US Deposit Trust and Clearing Company, demand for contracts betting on the fall of the yen against the US dollar and the euro is constantly rising. On April 24 alone, the volume of foreign exchange options trading in Japanese yen short selling near 156 yen against the US dollar reached 300 million US dollars.
Ah Feng's institution has been shorting yen since last year. He told the reporter that apart from the reason for the interest rate spread between the US and Japan, the Japanese economy itself also has many problems, such as low spending intentions, unreasonable export structure, etc., and the short-term recovery of the Japanese economy is not realistic. He believes it is unlikely that the Bank of Japan will raise interest rates further in the short term. However, the outlook for Japan's inflation is uncertain, making the Bank of Japan afraid to raise interest rates easily. This is the main reason the market is betting that the yen will continue to depreciate. Furthermore, Buffett's large-scale issuance of Japanese yen bonds is also betting that the yen will continue to fall. He determined that even if the Japanese government interferes with the exchange rate, it will only have a short-term effect. If the Federal Reserve maintains current interest rates until the second half of the year, the dollar will soon break through 160 against the yen.
Indonesia starts a war to defend its currency
Just as Japan and South Korea were still talking about defending their currencies, the Bank of Indonesia had already launched the first shot at defending the exchange rate.
On April 24, the Bank of Indonesia raised interest rates by 25 basis points above expectations and raised the benchmark interest rate to 6.25%, the first rate hike this year. Bank Indonesia Governor Perry Valgiyo said at a press conference that the decision to raise interest rates was a “pre-emptive and forward-looking move” aimed at stabilizing the Indonesian rupiah exchange rate, saying that all available tools will continue to be used to keep the Indonesian rupiah stable.
Since the beginning of the year, Indonesia has continued to depreciate against the US dollar, depreciating by more than 4%.
Jeffrey, an emerging market strategist at Oriental Huili Bank in Hong Kong, believes that the Bank of Indonesia will continue to maintain a hawkish stance and will further optimize relevant policies to attract foreign capital inflows while increasing the attractiveness of the Indonesian rupiah. Jeffrey stressed that the performance of the Indonesian rupiah will mainly depend on whether the policies to be introduced by the Bank of Indonesia will help reverse the recent outflow of funds from Indonesian financial accounts, and the US dollar interest rate will remain high for a longer period of time.
However, analysts generally question the effectiveness of the Bank of Indonesia's interest rate hike. The Bank of Indonesia's interest rate hike may help curb the continued depreciation of the Indonesian rupiah in the short term, but in the long run it will not be enough to stimulate the appreciation of the Indonesian rupiah. On the one hand, the trend of the Indonesian rupiah will still depend on the Federal Reserve's interest rate cut expectations. On the other hand, whether the Bank of Indonesia's policies can attract foreign investment into Indonesia will also be the key to determining the trend of the Indonesian rupiah.
Apart from the Indonesian rupiah, the Thai baht, the Malaysian ringgit, and the Philippine peso have all depreciated to varying degrees since the beginning of the year.
Goldman Sachs analyst Danny Suvarnaluti pointed out in a recently released report that the dollar trend is dominating Asian currencies. The growth rate of the Asian economy has picked up in recent months, and inflation has slowed. The tightening of macroeconomic policies should have further supported the domestic currency, but the theme that dominates the macro market is the Federal Reserve's policy path and its impact on the US benchmark interest rate and the US dollar.
The analyst also believes that the current expectations for the Fed to cut interest rates are in stark contrast to the beginning of this year, opening up room for a further rise in the US dollar. When the US dollar rises, the Korean won, Malaysian ringgit, and Indonesian rupiah are most sensitive. If the US dollar continues to rise, these currencies are at greatest risk of depreciation, and the Indian rupee is less sensitive.
In an interview with reporters, Chen Li also said that the general depreciation of Asian countries' currencies is affected by many factors: first, the US benchmark interest rate remains high, and the US dollar continues to strengthen, putting significant depreciation pressure on other currencies; second, economic growth in some Asian countries, such as Thailand and the Philippines, is slowing down, increasing the pressure on currency depreciation; furthermore, due to the fragmentation of monetary policies in various countries, Asian central banks are not fully in sync with the US. Policy differentiation may cause currency depreciation.
Regarding the duration of this round of devaluation, Chen Li believes that this will be affected by factors such as the monetary policies of central banks, the international trade environment, geopolitical conflict situations, and prospects for global economic recovery, and there is a lot of uncertainty. If the pressure to depreciate the currency of each country is not relieved, the monetary authorities of each country may introduce a series of monetary policies to prevent currency crises, including policies such as adjusting benchmark interest rates, money market operations, structural reforms, and strengthening international cooperation and coordination to maintain the stability of the exchange rate market.
As to whether a new round of financial crisis has already occurred, Chen Li believes that similar to the 1997 financial crisis, the current depreciation of Asian currencies has also been affected by changes in the Federal Reserve's monetary policy and the US dollar exchange rate, and there has also been a general depreciation of Asian countries' currencies. However, Chen Li stressed that the 1997 financial crisis was mainly due to a sharp depreciation of the Thai baht, which then spread to other Southeast Asian countries, and eventually led to a regional financial crisis. Although Asian currencies have depreciated this time, the magnitude of depreciation is less than the magnitude of the 1997 financial crisis. In the short term, it has not reached the level of a “crisis.”
The trend of RMB is independent
When many Asian currencies depreciated, the renminbi did not follow suit.
In March, the RMB multilateral exchange rate index rose for three consecutive months: the CFETS RMB Exchange Rate Index and the RMB Exchange Rate Index, which refers to the BIS and SDR currency baskets, rose 0.3%, 0.5%, and 0.3%, respectively. The increases were 0.2, 0.1 percentage points narrower and 0.2 percentage points larger than the previous month, respectively.
In the offshore RMB market, the USD/RMB has fluctuated slightly between 7.16 and 7.28 since the beginning of the year.
Regarding the trend of the RMB exchange rate, the announcement of the central bank's monetary policy committee for the first quarter of 2024 stated, “Resolutely correct procyclical behavior, resolutely prevent the risk of exchange rate overregulation, and prevent the formation of uniform unilateral expectations and self-strengthening.” On April 18, Zhu Hexin, deputy governor of the central bank and director of the Bureau of Foreign Exchange, stressed at the press conference of the State Information Office that “the goal and determination to maintain the basic stability of the RMB exchange rate will not change. The RMB exchange rate has a foundation and conditions to maintain basic stability,” and reiterated “resolutely correct procyclical behavior, prevent the market from forming unilateral expectations and strengthening itself, and resolutely prevent the risk of exchange rate overregulation.”
Chen Li believes that the US dollar index has fluctuated clearly recently, and the RMB exchange rate will remain fluctuating in both directions in the short term. Despite the slight depreciation of the RMB against currencies such as the US dollar, the RMB is still strong compared to other Asian currencies. Chen Li also believes that the currency crisis in other Asian countries may have some impact on the RMB exchange rate in the short term, but overall, the extent of the impact is quite limited. In fact, the RMB exchange rate is mainly affected by China's economic fundamentals and the central bank's monetary policy. China's macroeconomic economy still has strong support. The central bank's monetary policy continues to gain strength, and the RMB exchange rate is expected to remain strong.
Analysts at CITIC Securities clearly believe that since March, a moderate restoration of economic fundamentals has supported the RMB exchange rate, but it is difficult to drive a sharp rebound. In the short term, with the US dollar index running at a high level, the RMB exchange rate may still be under pressure, but considering that financial accounts represented by the stock and bond markets maintain net inflows and that the central bank's policy of stabilizing the exchange rate remains strong, etc., it is unlikely that the exchange rate will break through before it was high.
edit/emily