Japan, South Korea, Indonesia and many other countries have launched a currency defense war! What is the situation of the renminbi?

Beijing Daily client

2024-05-06 13:04Published on the official account of Jiangsu Beijing Daily

On April 29, the Japanese government intervened in the foreign exchange market, causing the yen to change its decline and appreciate 2% against the US dollar in a single day. But year-to-date, the "yen crash" has become a hot topic in the industry. In Asia, the depreciation of the yen is not unique. Many emerging market currencies in Asia have continued to depreciate against the US dollar this year. It will be interesting to see if a new financial crisis is happening in Asia.

The depreciation of the yen accelerated

"I went on two trips to Japan this year. It's very cost-effective 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 exchanged for 16.2 yen, and now 1 Hong Kong dollar can be exchanged for 20 yen. Admission to Tokyo Disneyland is 9,900 yen, which was about HK$610 at the beginning of the year and HK$495 now. It's almost a 20% discount. The base ticket for Hong Kong Disneyland is HK$639 and the Shanghai Disneyland ticket is HK$625. Ah Feng is an investment manager at a small hedge fund in Hong Kong, where he is responsible for foreign exchange trading. He told reporters that investment institutions that are betting on the depreciation of the yen this year have made a lot of profits.

The rapid depreciation of the yen has clearly stimulated the tourism industry. According to the estimates of the Japan National Tourism Organization, the number of visitors to Japan exceeded 3 million for the first time in March, the highest level in a single month. The data also shows that in the first quarter of this year, the total tourism consumption of tourists visiting Japan reached 1,750.5 billion yen (about 81.9 billion yuan), a record high in a single quarter. Compared with before the epidemic, European and American tourists have increased the most. An important factor contributing to the rapid rebound in the number of tourists to Japan is 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.

But a sharp depreciation of the yen is not something everyone is happy with. Japanese government officials have warned against the rapid depreciation of the yen. Japan's Vice Minister of Finance, Mato Kanda, has said publicly that the benefits of a weak yen are diminishing, and the market has been volatile recently, and excessive exchange rate movements are not good for the economy.

In addition to the yen, the won is also in a rapid depreciation channel this year. The South Korean won recently rose above 1400 against the US dollar for the first time since November 7, 2022. But after Bank of Korea Governor Rh.J. Won-yong warned about exchange rate volatility, the won's performance has picked up recently. But year-to-date, the won is still depreciating more than 4% against the dollar.

Chen Li, chief economist of Chuancai Securities, said in an interview with the Securities Times that South Korea and Japan are both developed countries and are closely connected to the international financial market. Against the backdrop of successive large interest rate hikes by the Federal Reserve, the central banks of South Korea and Japan have maintained relatively loose monetary policies. The monetary policy performance of Japan, South Korea and the United States diverged, interest rate differentials widened, the dollar strengthened, and the depreciation pressure on the yen and won increased.

In fact, the yen, which continues to depreciate, has become the object of international capital bets.

The latest data released by the U.S. Commodity Futures Trading Commission (CFTC) showed that hedge funds and asset managers had a total short position in the yen of 184,180 in the week ended April 23, the highest since 2006. At the same time, trading data released by the US Depository Trust and Clearing Corporation showed that demand for contracts to bet on the fall of the yen against the dollar and the euro is rising. On April 24 alone, the volume of foreign exchange options shorting the yen around 156 against the dollar reached $300 million.

Ah Feng's institution has been shorting the yen since last year. He told reporters that in addition to the reasons for the interest rate differential between the United States and Japan, the Japanese economy itself also has many problems, such as low willingness to consume, unreasonable export structure, etc., the short-term recovery of the Japanese economy is not very realistic, and he believes that the Bank of Japan is unlikely to raise interest rates further in the short term. And the uncertain inflation outlook in Japan makes the Bank of Japan afraid to raise interest rates easily. This is the main reason why the market is betting on the continued depreciation of the yen. In addition, Warren Buffett's large-scale issuance of yen bonds is also a bet that the yen will continue to fall. He judged that even if the Japanese government intervenes in the exchange rate, it will only play a short-term role, and if the Fed maintains the current interest rate until the second half of the year, the USD/JPY break through 160 will soon come.

Indonesia has started a currency defense war

While Japan and South Korea are still paying lip service to defending their currencies, Indonesia's central bank has fired its first shot to defend its exchange rate.

On 24 April, Bank Indonesia raised interest rates by 25bp more than expected, raising its benchmark interest rate to 6.25%, the first rate hike this year. Bank Indonesia Governor Perry Vargiyo said at a press conference that the decision to raise interest rates was a "preemptive and forward-looking move" aimed at stabilizing the rupiah's exchange rate, saying it would continue to use all available tools to keep the rupiah stable.

Year-to-date, Indonesia has continued to depreciate against the US dollar, by more than 4%.

Jeffrey, emerging markets strategist at Crédit Agricole CIB in Hong Kong, believes that Bank Indonesia will continue to maintain a hawkish stance and will further optimize relevant policies to attract foreign capital inflows, while enhancing the attractiveness of the rupiah. Jeffrey stressed that the performance of the rupiah will mainly depend on whether the upcoming policies of Bank Indonesia will help reverse the recent outflow of funds from Indonesia's financial account, and the US dollar interest rate will remain high for longer.

However, analysts generally question the effectiveness of Bank Indonesia's interest rate hike moves, Bank Indonesia's interest rate hike may help curb the continued depreciation of the rupiah in the short term, but in the long run, it is not enough to stimulate the appreciation of the rupiah, on the one hand, the trend of the rupiah will still depend on the Fed's interest rate cut expectations, on the other hand, whether the Bank Indonesia's policy can attract foreign capital into Indonesia will also be the key to determine the trend of the rupiah.

In addition to the Indonesian rupiah, the Thai baht, the Malaysian ringgit and the Philippine peso have all depreciated to varying degrees year-to-date.

Financial market performance in Asia (as of 6 May)

Goldman Sachs analyst Danny Suvanaruti noted in a recent report that the 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.

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

In an interview with reporters, Chen Li also said that the general depreciation of the currencies of Asian countries is affected by many factors: First, the US benchmark interest rate remains at a high position, and the US dollar continues to strengthen, which has exerted significant depreciation pressure on other currencies; second, the economic growth of some Asian countries such as Thailand, the Philippines, and other countries has slowed down, which has intensified the pressure on currency depreciation; in addition, the monetary policies of various countries are differentiated, and the central banks of Asian countries are not completely synchronized with the United States in terms of monetary policy, and policy differentiation may lead to currency depreciation.

As for the duration of this round of depreciation, Chen Li believes that it will be affected by the monetary policy of central banks, the international trade environment, geopolitical conflicts, global economic recovery prospects and other factors, with more uncertainties. If the pressure of currency depreciation is not alleviated, the monetary authorities of various countries may introduce a series of monetary policies to prevent currency crises, including adjusting benchmark interest rates, money market operations, structural reforms, strengthening international cooperation and coordination and other policies to maintain the stability of exchange rate markets.

As to whether a new round of financial crisis has emerged, Chen Li believes that similar to the 1997 financial crisis, the current depreciation of Asian currencies is also affected by the changes in the US Federal Reserve's monetary policy and the US dollar exchange rate, and there is also a general depreciation of the currencies of Asian countries. However, Chen Li stressed that the financial crisis in 1997 was mainly due to the sharp depreciation of the Thai baht, which then spread to other Southeast Asian countries, and finally formed a regional financial crisis. Although Asian currencies have depreciated this time, the depreciation has been less than that of the 1997 financial crisis. In the short term, the level of a "crisis" has not yet been reached.

The renminbi moves independently

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, the RMB exchange rate index of the reference BIS and SDR currency baskets rose by 0.3%, 0.5% and 0.3% respectively, narrowing by 0.2 percentage points, 0.1 percentage points and expanding by 0.2 percentage points respectively from the previous month.

In the offshore renminbi market, USD/CNY has moved slightly in a range of 7.16 and 7.28 year-to-date.

Regarding the trend of the RMB exchange rate, the announcement of the regular meeting of the Monetary Policy Committee of the People's Bank of China in the first quarter of 2024 pointed out that "we will resolutely correct pro-cyclical behavior, resolutely prevent the risk of exchange rate overshoot, and prevent the formation of unilateral consensus expectations and self-reinforcement". On April 18, Zhu Hexin, deputy governor of the People's Bank of China and director of the State Council Information Bureau, stressed at a press conference of the State Council Information Office that "the goal and determination to maintain the basic stability of the RMB exchange rate will not change, and the RMB exchange rate has the foundation and conditions to maintain basic stability", and reiterated that "we will resolutely correct pro-cyclical behavior, prevent the market from forming unilateral expectations and self-reinforce, and resolutely guard against the risk of exchange rate overshoot".

Chen Li believes that the US dollar index has fluctuated significantly recently, and the RMB exchange rate will maintain two-way fluctuations in the short term. Despite a slight depreciation against currencies such as the US dollar, the renminbi has remained strong relative 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 the overall impact is relatively limited. In fact, the RMB exchange rate is mainly affected by China's economic fundamentals and the central bank's monetary policy, China's macro economy still has strong support, the central bank's monetary policy continues to exert force, and the RMB exchange rate is expected to remain strong.

CITIC Securities analysts clearly believe that since March, the moderate repair of economic fundamentals has supported the RMB exchange rate, but it is difficult to drive its sharp rebound. In the short term, the RMB exchange rate may still be under pressure under the high level of the US dollar index, but considering that the financial accounts represented by the stock and bond markets have maintained net inflows, and the central bank's exchange rate stabilization policy has maintained strength, the probability of the exchange rate breaking through the previous high is not large.

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