Emerging Asian currencies are set to weaken in the coming year as regional central banks ease policy, but their fall will be cushioned by expectations the US.
Federal Reserve may not be able to raise interest rates this year, a Reuters poll showed.
The consensus from more than 90 foreign exchange strategists polled by Reuters over the past week was for major Asian currencies to depreciate 1-5% by this time next year, with the Indonesian rupiah leading the losses.
Coming just over a week after Britain’s shock vote to leave the European Union rattled financial markets, that underscores analysts’ confidence that Asian currencies can withstand global risks better than they did a few years back when the Fed’s reduction in bond purchases sent them into a free-fall.
“For Asian currencies, perhaps more important than the initial shock from Brexit, is the fact that markets believe the Fed is now in a bind, worrying about tighter financial conditions,” said Andy Ji, currency strategist at CBA.
“The Fed has already started scaling back its hawkish views and that should support regional FX while holding the dollar in the medium term.”
Indeed, futures contracts indicate markets are giving only about a one-in-five chance of a Fed rate hike, even as far out as February next year, according to CME Group data.
Coupled with rising prospects of policy easing in several countries such as Australia, New Zealand, South Korea, Japan, China and Thailand, that will likely dampen chances of any rise in regional currencies resulting from a weak dollar.
The poll showed the closely-managed Chinese yuan will depreciate about 1.5% from now until the end of June next year, on top of the 2.4% it has lost since January.
Median forecasts from the latest poll are for it to ease to 6.70 per dollar by end-December, from 6.67 yesterday, and fall further to 6.76 by end-June 2017.
That 12-month consensus is the weakest in several months of Reuters polls and if it materialises, the yuan would have come close to matching last year’s record decline of 4.5%.
Reuters exclusively reported last week that China would tolerate a fall in the yuan to as low as 6.8 per dollar.
Also known as the renminbi, the yuan has been one of the main sources of global financial market turmoil since last August, when the People’s Bank of China devalued it in an attempt to boost growth, which has since reportedly stabilised.
“The run-up in USD/CNY in June cannot be blamed on US dollar and an even more noticeable slide in the yuan versus a basket (of currencies) lays bare Chinese objectives: to weaken the renminbi,” analysts at BTMU wrote.
“That the largest participant in the global trading system seems to want to engineer an 11% annual trade-weighted depreciation and no one says a word is remarkable, but stranger things have happened before.”
The Chinese yuan is usually a proxy for currencies of other Asian countries which trade heavily with the world’s second-largest economy and influences their prospects.
That was reflected in the poll consensus, which showed the Indonesian rupiah and South Korean won would lose about 5% and 4%, respectively, by end-June next year.
The rupiah is forecast to fall to around 13,761 per dollar by end-June next year from yesterday’s 13,100, while the won, which has strengthened more than 2% is predicted to slide to 1,200 per dollar from its current level of 1,155.
Analysts also predicted the Indian rupee would weaken to about 69.0 in six months and to 69.3 in a year, on hopes the Reserve Bank of India will cut interest rates further.
RBI governor Raghuram Rajan is due to step down in September after having overseen a period of relative stability in the currency.