Investors should sell Asian currencies against the US dollar on prospects the region’s central banks will let their currencies weaken to revive faltering growth, Morgan Stanley said.
Asian central banks from China to Singapore, which have allowed stronger exchange rates to battle inflation in recent months, may soon reverse their currency policies to bolster growth, Morgan Stanley’s London-based analysts Stephen Jen (任永力) and Charles St-Arnaud wrote in a note on Thursday.
The region’s currencies have risen 3 percent against the US dollar since August, according to the Bloomberg-JPMorgan Asia Dollar index.
“As soon as growth decelerates, policies should shift to protect growth” as Asia is not single-minded about inflation risks, the analysts said. “For the first time in two years, we are recommending that investors be cautious about short US dollar-Asian ex-Japan positions.”
The second-biggest US securities firm by market value also said Asian countries do not suffer from the sustained inflationary problems such as those experienced by Latin American economies.
From 1985 to last year, inflation averaged 4.4 percent in South Korea, 1.9 percent in Taiwan, 1.3 percent in Singapore and 2.6 percent in Malaysia. The rates were higher in Indonesia and the Philippines at 10.8 percent and 8.1 percent respectively in the past two decades, Morgan Stanley said.
The pace of the yuan’s gains will slow as the appreciation itself is inflationary, the US firm said. The yuan has advanced 4.5 percent this year as consumer price gains in March accelerated to 8.3 percent, close to the fastest pace in 11 years.
Speculation of faster gains in the currency have flooded the economy with cash and boosted foreign-currency reserves to a record. China is reconsidering its policy of quickening the yuan’s advance because it hurts exports and fuels hot money inflows, Market News International said on Monday.
“Strong expectations of further Chinese yuan appreciation have themselves led to large balance of payments surpluses, growth in high-powered money, and ultimately inflation,” the report said.
The IMF said on April 11 that growth in Asia, including Japan, Australia and New Zealand, would slow to 6.2 percent this year, from a 6.6 percent pace predicted in October.
When growth starts to decelerate “policy makers will likely significantly slow down the pace of the appreciation of their currencies or reverse this long-standing trend altogether,” Jen and St-Arnaud said.
The New Taiwan dollar, Singapore’s currency and the yuan are the top three performers this year among the 10 most-traded currencies in the region outside Japan, while the South Korean won, India’s rupee and the Philippine peso are the worst performers.
The “Greater Chinese” currencies, the Singapore and Taiwan dollars, along with the yuan, may “outperform most other currencies,” Morgan Stanley said, without elaborating.