Asian Currencies Fall Most in 6 Months as Yen Fuels Intervention
Comment of the Day

January 25 2013

Commentary by Eoin Treacy

Asian Currencies Fall Most in 6 Months as Yen Fuels Intervention

This article by David Yong and Yumi Teso for Bloomberg may be of interest to subscribers. Here is a section
Asian currencies fell this week by the most since July as a slide in the yen fanned concern regional central banks will intervene to prevent gains that may hurt exports.

Officials from Russia to Thailand have voiced concern that Japan's intention to weaken the yen will stoke competitive devaluations. The Bloomberg-JPMorgan Asia Dollar Index retreated from a 16-month high as the yen headed for an 11th weekly loss. Samsung Electronics Co. said today that gains in the won, which strengthened 8.3 percent in 2012, may cut operating profit by 3 trillion won ($2.8 billion) this year.

“The authorities are getting more uncomfortable with sharp appreciation against the dollar and the yen,” said Wee-Khoon Chong, a strategist in Hong Kong at Societe Generale SA. The uncertainty surrounding global growth, currency gains and the risk of intervention are prompting retreats in regional currencies, he said.

Eoin Treacy's view As the Japanese express their clear intent to devalue their currency further, the unilateral nature of this move has raised concerns among investors of a competitive devaluation. This risk is most acute in Asia where a considerable number of economies share an export oriented growth model. Throughout the last decade Asian currencies generally appreciated as sound fiscal policy made them more appealing. The relative strength of their currencies also mitigated commodity price inflation somewhat.

The appreciation of China's Yuan and the Japanese Yen in particular allowed other Asian countries a measure of largesse in how much they allowed their respective currencies to appreciate without putting undue pressure on their competitiveness relative to each other. The question now is whether they are willing to tolerate additional Yen weakness and a loss of competitiveness relative to Japan's export sector without acting themselves?

The Asia Dollar Index, which includes the Chinese Yuan as its largest component but excludes the Yen, pulled back rather sharply today. It is now testing the short-term progression of higher reaction lows and a clear upward dynamic will be required to check potential for further downside.

While Samsung's projected currency losses of $2.8billion are expected to be as a result of the Won's strength against the Chinese Yuan and Brazilian Real, the case remains well made for some form of intervention to weaken the currency. The Won strengthened persistently from June and had returned to test its 2011 KRW1050 peak. The US Dollar found support two weeks ago and has now rallied to break the six-month progression of lower rally highs. A clear downward dynamic would be required to question medium-term scope for additional strength.

The Dollar also found support against the Thai Baht, Taiwan Dollar and Singapore Dollar and looks equally likely to extend its advance. .

As if the situation were not complicated enough the Finnish Finance minister complained today that the Euro was getting too strong. When we look at reasonably long-term charts, the Euro is rallying from a retest of its 2010 lows while the Dollar is similarly rallying from a reasonably depressed area. Against this background there is scope for Asian currencies to weaken further but this remains a highly political environment and therefore uncertain. It will be particularly interesting to see what effect these movements will have on Chinese policy since they are unlikely to continue to allow the Yuan to appreciate when almost all of their trading partners are engaged in debasement. .

From as early as 2002, the reliability of Asian currency appreciation has been a powerful encouragement for those seeking to invest in the region. If this policy is now changing it is likely to contribute to more variability in Asian stock market returns for foreign investors.

If competitive devaluation becomes a reality beyond the short term, it is likely to result in additional quantitative easing which could act as a tailwind for risk assets.


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