Currency patterns in the developing world will proceed to deviate from one another for the foreseeable future. Ongoing developments in domestic politics, commodity prices, macroeconomic trends and official policymaking – in additional to unpredictable event risks – will navigate the direction of emerging market foreign exchange rates this year and next. Standardized real effective, trade-weighted exchange rates (REER) classify the Hong Kong and Singaporean dollars (HKD and SGD, respectively), Chinese yuan (CNY), Philippine peso (PHP) and Thai baht (THB) among the leading performers globally, whereas the worst performing developing market currency is still the Russian ruble (RUB), which ranks fourth lowest in performance among all exchange rates worldwide.
The current economic, political and policy environment in emerging Asia is unlikely to undergo much change in the period ahead mirrored by the persistent strength of the HKD, PHP, CNY, SGD and THB in REER terms. Forecast upticks in Singaporean, Philippine and Thai aggregate economic growth, accompanied by either stable or decelerating rates of advance in consumer prices and either persistent surpluses or steady deficits in their current accounts as a proportion of nominal GDP, should remain beneficial to the SGD, PHP and THB buttressed by steady-to-higher interest rate trends. The SGD is managed in a stabilized framework (targeted two percent policy range against a basket of currencies of the country’s major trading partners) for the purpose of maintaining domestic price stability. The legal exchange rate arrangement of both the PHP and THB is free-floating.
However, of the latter three Southeast Asian exchange rates, the THB could encounter downside volatility originating on the political front if the military junta governing Thailand disappoints voters and investors alike by bolstering its authoritarian rule evident in its failure to present a credible plan for restoring democracy by scheduling elections in the near future. Weak commodity prices will also limit upside potential for both the PHP and THB as will stable to easier monetary policies in the Philippines and Thailand, correspondingly.
Anticipated further credit accommodation by the monetary authorities in Beijing amid a receding cost of living and official plans to augment infrastructure investments to stimulate economic activity should forestall the pace of expansion in the national economy from slipping below seven percent in 2015. Yet, only modest tinkering by the PBoC, at the instruction of the State Administration of Foreign Exchange (SAFE), of the currency’s two percent fluctuation band, in the context of the country’s de jure managed floating foreign exchange regime, are expected during the course of the year regardless of the tendencies in short-to-intermediate term interest rates.
Global Markets Intelligence (GMI) expects no alterations anytime soon to the currency board, exchange rate regime – adopted almost thirty-two years ago for the HKD – that requires the Hong Kong Monetary Authority (HKMA) to underwrite the monetary base fully with the US dollar (USD) and match variations in the Special Administrative Region’s (SAR) high-powered money stock entirely with corresponding changes in the USD at a fixed conversion rate of HKD7.80 per USD.
Fundamentally, the economy appears on course to pick up speed this year and next as inflation slows to 3.5 percent during the same time frame accompanied by only a modest rise in interest rates at the front- and back-ends of the yield spectrum. The external payments surplus is likely to increase to 2.4 percent of nominal GDP by 2016 even though the budget overage should decline to 0.8 percent of money GDP. Even so, Hong Kong’s formidable financial resources (that is, abundant foreign exchange reserves) would be employed to defend the currency peg against any selling pressure that may arise unexpectedly to the HKD’s disadvantage.
Taiwan, meanwhile, should experience a moderate speedup in the tempo of macroeconomic activity in 2015 to 3.6 percent, followed by still strong, albeit slower, momentum of 3.5 percent in 2016. A projected acceleration in business activity notwithstanding, the pace of household inflation is unlikely to quicken materially until 2016, encouraging the central bank to keep rates on hold until next year. Enduring double-digit balance of payments surpluses of 11 – 12 percent of nominal GDP are expected to furnish the free-floating TWD further scope for appreciation this year and next. The only glitch to the optimistic TWD forecast might emanate from the political sphere in 2016, when election campaigns for the presidency and national legislature get underway may trigger alternating patterns of buying and selling pressure on the currency.
Under unremitting selling pressure owing to an anticipated downward trajectory for front- and back-end interest rates, the market-driven South Korean won (KRW) is likely to depreciate further this year. Despite forecasts of solid single-digit budget and external payments surpluses as a percent of money GDP and since no elections will be held until next year, the only potential source of disruption to a continued stable weakening of the KRW would be Pyongyang in the form of another round of threatening declarations and/or military maneuvers. If, however, non-inflationary macroeconomic growth were unexpectedly to capitulate to either a blaze of hastier- or a spate of slower-than-projected domestic economic growth, the KRW could face a burst of volatility to the upside or downside depending on the intensity of economic activity.
The chronic, eight-month sell-off of the Malaysian ringgit (MYR) – which Bank Negara operates as a managed float with reference to a currency basket, the composition of which is undisclosed – is projected to bottom this year and stabilize in 2016 as interest rates, both long and short, head lower in response to a slowdown in the rate of national economic growth. With no general elections expected until 2018, the government of the ruling Barisan Nasional coalition under Prime Minister Najib Razak will concentrate its efforts on stimulating domestic demand via monetary and fiscal channels. A wider budget shortfall and narrower current account surplus as a proportion of nominal GDP will continue to weigh adversely on the MYR.
As for the Indian rupee (INR) and Indonesian rupiah (IDR), the future of both currencies rides on the extent to and speed of which both recently elected reformist regimes can press ahead with structural improvements of their respective domestic economies. In New Delhi, Prime Minister Narendra Modi and his cabinet are likely to make further progress in bringing much-needed change to overly regulated and cartelized sectors of the Indian economy. A mildly expansionary budget, approved by the parliament, is expected to do little, or no, damage to country’s fiscal condition, and the negative current account gap should narrow considerably to -1.3 percent of money GDP regardless of an anticipated quicker rate of economic growth.
National living costs are forecast to plateau at around the 6.5 percent level in 2015 and decelerate thereafter, which should give the Reserve Bank of India sufficient leeway to reduce short-term lending rates and promote a decrease in the inflation premium demanded by investors at the long-end of the sovereign debt yield curve. In light of the circumstances, we believe the INR will continue to lose value steadily in its pairing vis-à-vis the USD, but – on an inflation-adjusted effective, trade-weighted basis – gradually edge higher, reflecting improved competitiveness of Indian products and services internationally.
The forthcoming path of the Indonesian rupiah, the arrangement of which is flexible and free floating, will pivot on the willingness of the reformist regime of President Joko Widodo to move forward with far-ranging structural adjustments to the domestic economy – especially in industries that have become increasingly uncompetitive due to excess regulation and widespread cartelization. A further modest strengthening of domestic economic conditions, combined with peaking household inflation and contracting budget and external payments shortfalls as a percentage of nominal GDP, should enable Bank Indonesia to loosen credit further, laying the groundwork for additional weakening of the IDR bilaterally versus the USD. Yet, like India, if the government can manage to deregulate some key sectors and implement some major reforms, foreign capital would pour into Jakarta – elevating the IDR in both nominal and volume-based trade-weighted terms.