Goldman Sachs: Embracing the wave of depreciation in Asia

Wall Street Sights

2024-04-17 12:02Posted on the official account of Shanghai Wall Street

A strong US dollar is sending Asian currencies to a full-blown storm.

Goldman Sachs analyst Danny Suwanapruti noted in a recent report that the US dollar is dominating Asian currencies. Growth in Asia has picked up in recent months, inflation has slowed, and macro policy tightening should have further supported domestic currencies, but the dominant theme in macro markets is the Fed's policy path and its impact on US benchmark interest rates and the US dollar.

Goldman Sachs believes that the current expectation of a Fed rate cut is in stark contrast to the beginning of this year, opening up room for the dollar to rise further, when the dollar rises, the South Korean won, the Malaysian ringgit, the Indonesian rupiah is the most sensitive, if the dollar continues to rise, these currencies are most at risk of depreciation, and the Indian rupee is less sensitive.

Media analysis pointed out that the strength of the dollar and the expectation that U.S. interest rates will remain high for a long time have reduced investors' demand for emerging market assets, resulting in depreciation pressure on emerging market currencies. Investors can earn significant returns by holding US dollars without the additional risk of investing in emerging markets.

Mitul Kotecha, head of Asia FX and emerging markets macro strategy at Barclays, said, "Most Asian currencies are having to succumb to the strength of the US dollar. Asian currencies were weakened by the broader strengthening of the US dollar in the currency market, driven by higher US Treasury yields and rising risk aversion in the market. ”

Goldman Sachs expects that the two central banks that are most active in defending currency weakness at a time of sharp currency depreciation are Indonesia and the Central Bank of the Philippines, as these two countries are economies with current account deficits, higher inflation rates and higher levels of external debt, and a sharp depreciation of their currencies could pose a greater risk to economic stability, while export-oriented economies with low inflation and current account surpluses (South Korea and Thailand) will be more tolerant of currency weakness.

Asia's central banks need to act cautiously

Inflation has fallen in most Asian economies, creating conditions for central banks to cut interest rates, but emerging market central banks are afraid to "act rashly" due to the pressure of currency depreciation. Most emerging countries have already finished raising interest rates in 2023, but the United States continues to postpone interest rate cuts, and the more likely it is that emerging countries will delay interest rate cuts or even switch to rate hikes.

Morgan Stanley pointed out that if the Asian central bank cuts interest rates one step ahead of the Fed, the currency will be under further depreciation pressure, which may put upward pressure on inflation, so it is expected that Asian central banks will wait for the Fed to start cutting interest rates in June (the baseline scenario of the US economic team) before starting to act.

According to a report released by the International Monetary Fund (IMF), a stronger dollar will lead to capital outflows, higher import prices, and tighter financial conditions in these economies.

In order to stabilize the exchange rate, central banks are taking action one after another.

Today, South Korea's finance minister Choi Sang-mu and Japanese finance minister Shunichi Suzuki met on the sidelines of the G20 spring meeting, both worried about the weakening of the won and yen, according to a statement from the South Korean Ministry of Finance. The two officials mentioned that they could take action against volatile exchange rate fluctuations.

Bank of Korea Governor Rhee Chang-yong said today that the recent weakness of the won has been slightly overdone, and that the Bank of Korea has the tools to act on the issue of exchange rate fluctuations. In an interview with the media, Rhee said that the central bank is ready to take stabilization measures and has sufficient resources to do so.

The Bank of Thailand once again left its policy rate unchanged at its latest monetary policy meeting to support the exchange rate. In contrast to Japan, South Korea, and Thailand, Indonesia's central bank went straight to the market and sold high-yield securities and bought the rupiah to curb the decline in its currency.

Goldman Sachs concluded that central banks in different types of economies may adopt different response strategies. Central banks in export-oriented economies may be more receptive to weaker currencies, while central banks in economies with higher levels of current account deficits, inflation, and external debt may be more proactive in taking measures to stabilize their currencies:

We believe that Bank Indonesia is even willing to raise interest rates further to maintain the stability of the rupiah, and the Bangko Sentral ng Pilipinas has already expressed its determination to curb currency depreciation through successive rate hikes in 2022.

Goldman Sachs expects that if the dollar rises further, then USD/KRW will move closer to the October 2022 high of 1441, and USD/THB will move closer to the September 2022 high of 38.37. It is worth noting that USD/INR and USD/MMR are already very close to their previous all-time highs, and further weakness is expected in the future.

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