Sat, Nov 28, 2015 page13

• Declining euro can drag Asian currencies down

  NOT IMMUNE: The drop in the euro’s value raised the competitiveness of European manufacturers against their Asian counterparts, causing a slump in their exports

  • Bloomberg
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  When Morgan Stanley’s top currency strategist visited Asia last week, he told clients their fixation with the US Federal Reserve was causing them to overlook risks in Europe.

  Asian currencies would weaken next year as declines in the euro, already at a seven-month low on bets the European Central Bank will step up monetary stimulus on Dec. 3, act as a drag on the region’s export-driven economies, Hans Redeker, global head of foreign-exchange strategy, said in an interview in Singapore.

  Overseas shipments shrank nine months this year in Taiwan, eight months in China and 10 months in South Korea.

  In the eurozone, September marked an eighth straight gain from year-earlier levels.

  “You shouldn’t underestimate the impact of the euro,” Redeker said, adding that Europe has a “significant manufacturing base.”

  Asian companies face high debt levels and excess capacity as economies reel from a slowdown in China, he said.

  While Asian currencies have fallen versus the US dollar this year, all except Malaysia’s ringgit have strengthened against the euro, giving European manufacturers of cars and electronics a competitive advantage.

  Though Goldman Sachs Group Inc predicts emerging markets would turn the corner next year after a three-year rout, it also sees declines in the currencies of Taiwan, China, South Korea and Singapore.

  The 12.1 percent decline in Taiwan’s exports to Europe this year has outpaced the 9.6 percent drop for all destinations.

  Europe accounts for 12.5 percent of South Korea’s overseas sales and 18 percent of China’s.

  Morgan Stanley predicts the New Taiwan dollar will weaken 8.8 percent from yesterday to NT$36 by the end of next year, the won will slump 11 percent to 1,300 per US dollar and the Singapore dollar will drop 5.4 percent to S$1.49.

  It sees the yuan declining 7.5 percent to 6.91 and the euro retreating to draw level with the greenback.

  Goldman Sachs has identical projections for the won and Singapore dollar, and sees the yuan at 6.8 and the New Taiwan dollar at NT$34. Their forecasts are more bearish than the median estimates of strategists surveyed by Bloomberg.

  The currencies of Taiwan, Singapore and South Korea are the most sensitive to the euro, data compiled by Bloomberg show.

  The correlation between the euro and its Asian counterparts has increased to 0.78 in the past five years from 0.64 in the preceding period, according to Australia & New Zealand Banking Group Ltd (ANZ).

  That indicates moves in the common currency have a bigger influence on Asian exchange rates versus the US dollar. A reading of 1 means they move in lockstep.

  “Generally, if the euro were to weaken, there is a need for Asian currencies to weaken, as well to maintain some form of relative competitiveness," Singapore-based ANZ senior foreign-exchange strategist Khoon Goh said.

  While Asian currencies have retreated in the spot market in anticipation that the Fed will raise interest rates, indexes compiled by the Bank for International Settlements show they are still relatively strong in trade-weighted terms, after adjusting for inflation.

  A measure of the yuan is near record highs and the won is close to its strongest since 2008. While the Singapore dollar’s gauge has dropped, it is at levels similar to those in 2012. Taiwan’s gauge has risen, ending two years of declines.

  “The currencies don’t look that cheap," Singapore-based Barclays PLC head of Asian foreign-exchange and interest-rate strategy Mitul Kotecha said. “When you look at real-effective rates, they haven’t weakened significantly. That’s why there’s probably still more room for further depreciation. China and the Fed remain the biggest factors."

  While emerging-market currencies as a whole look attractive, they could remain under pressure over the medium term as diverging monetary policies in the US, Japan and Europe boost the greenback, New York-based JPMorgan Investment Management Inc global market strategist Andres Garcia-Amaya said.

  Any further yuan devaluation will also hurt Asian currencies, he said.

  “The US dollar bull trend is going to be with us next year," Redeker said. “Asian currency weakness will stay for the entire year.”
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