It is time to sell Asian currencies after their best monthly rally in more than seven years, Goldman Sachs Group Inc said.
The currencies are likely to resume declines, as further easing in China and Japan is likely to push the yuan and yen to their weakest levels since at least 2008, said Kamakshya Trivedi, a strategist at the bank who correctly predicted in November last year that emerging markets would recover this year.
South Korea’s won led last month’s rally with an 8.2 percent advance and Malaysia’s ringgit’s 7.8 percent jump was its biggest since 1998.
Photo: Reuters
A gauge of 10 Asian currencies, excluding the yen, rose 3 percent.
“These are good levels to short Asian currencies, especially the won, baht, [New] Taiwan dollar, yuan and ringgit,” Trivedi said in an interview.
Developing-nation exchange rates completed their strongest month since at least 1999 as commodities rebounded and the US dollar slumped on bets after the US Federal Reserve signaled it would move slowly in raising US interest rates.
However, Asian exports are yet to recover, raising the prospects for a fresh wave of devaluations across the region, as the yuan depreciates against China’s trade partners and expectations mount for an additional monetary stimulus in Japan, Trivedi said.
Goldman predicts a 14 percent plunge in the yen to 130 per US dollar in the next 12 months, a level last seen in 2002, and a 7.6 percent drop in the yuan to 7 versus the US dollar, which would be the weakest since May 2008.
The won is likely to decline almost 12 percent from current levels to 1,300 in the period, Trivedi said, who recommends shorting the Korean currency as the best way to position for the projected reversal in Asian exchange rates.
Slowing economic growth and prospects of further rate cuts in South Korea make Asia’s fourth-largest economy “a place where there are many ways to be right,” he said.
Goldman’s predictions for the yen, yuan and the won are more bearish than most. The Japanese currency is forecast to weaken to 118 per US dollar at the end of March next year, its Chinese counterpart is seen at 6.7 versus the US dollar in the same period and the South Korean won is projected at 1,218, according to the median estimates in separate Bloomberg surveys.
The yen rose 0.3 percent to 111.40 per US dollar as of 2:57pm in Tokyo and the won climbed 0.7 percent to 1,146.02 as investors maintained bets the US Fed would proceed cautiously on raising rates.
Markets in China were closed yesterday for the Tomb Sweeping Day holiday.
While the yuan has advanced 0.45 percent versus the US dollar this year, its nominal effective exchange rate has dropped the most in the region, Westpac Banking Corp indices show.
Even when the US dollar rebounds, China would want to retain trade-weighted losses to boost exports and maintain loose monetary conditions amid slowing economic growth, Goldman said.
“That means the yuan would weaken versus the [US] dollar,” Trivedi said. “If you see further depreciation of the yuan, either on a trade-weighted basis or versus the [US] dollar, it does mean these economies whose exports have already been suffering quite a bit could see further pressure and require further depreciation to keep their exports on a firm footing.”
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