Asian Central Banks Push Back, Sending Dollar Bears a Warning Sign

Dollar bears take heed: Asian central banks may be putting the brakes on the greenback’s slide.

After working for three years to staunch the yuan’s slump, China is now moving to combat the opposite problem. The People’s Bank of China has stopped using a component of its daily fixing formula that had been widely interpreted as a tool to support the currency, people familiar with the matter said Tuesday. The yuan sank on the news.

Meanwhile, South Korea’s government has been warning about the ascent in the won, Asia’s best-performing currency in 2017. And Taiwan’s central bank also sought to curb gains in its dollar.

With emerging-market currencies adding to last year’s rally, Asia’s exporting nations are fretting about the repercussions for their economies. The authorities’ efforts, on top of expectations for U.S. rate hikes, could spoil calls for the dollar to weaken further after a rout in 2017. The Bloomberg dollar index gained for a second straight day Tuesday.

“The PBOC adjustment to the fixing boosted the dollar and combines with other forces, like higher U.S. rates and inflation expectations, working to put a floor under the dollar,” said Ben Emons, chief economist at Intellectus Partners.

While the latest step by the PBOC effectively means it has reduced control over the yuan’s moves by removing the counter-cyclical factor, the fact that the currency slumped the most since October on Tuesday wasn’t lost on market participants.

September Echo

For Societe Generale strategist Kit Juckes, the move is reminiscent of September, when the PBOC effectively removed a reserve requirement for trading currency forwards, a shift seen as aimed at slowing yuan gains. The dollar rose the following four weeks, rebounding from its weakest levels since 2015, while U.S. yields climbed from the year’s lowest levels.

“Chinese policy matters more for global markets than it used to, and Chinese policy moves tend to be decided rather faster than those in the U.S. or Europe,” Juckes wrote in a note Tuesday.

Money has been pouring into emerging markets. In the week ended Jan. 9, overseas investors bought about $3 billion combined of South Korean and Taiwanese equities, and about $1.8 billion of Thai bonds, data compiled by Bloomberg show.

Strategists have been recommending emerging-market currencies amid a global growth picture that looks increasingly rosy. In a note published Monday, Goldman Sachs Group Inc. reiterated bullish calls on the Indian rupee, Indonesian rupiah and Korean won.

The appetite for the region’s assets may be tough to satiate, meaning officials’ attempts to stem the currency gains could prove futile. For example, traders expect Taiwan’s dollar to rally further, while analysts continue to point to why the won will keep strengthening.

“Factors supporting a weak dollar-strong won trend haven’t changed,” said Kim Doo-un, an economist at Hana Financial Group Inc. The Korean government has “merely suggested where the bottom is for spot to fall and that isn’t likely to change the trend.”

Manipulation Risk

There’s also the risk that meddling in exchange rates draws criticism from the Trump administration. The U.S. Treasury said in October that no major trading partner is manipulating its currency to gain an advantage in trade.

Here’s a rundown of some of the currencies gaining and officials’ response:

  • The Taiwan dollar climbed 8.7 percent in 2017. At the end of December, Taiwan’s central bank asked banks to purchase dollars after the local currency extended gains at a four-year high, according to people familiar with the matter
  • The South Korean won fell from a three-year high versus the greenback Monday after a government official told Bloomberg News that it would take steps “sternly” to stem one-sided moves in the currency
  • The yuan reached 6.476 per dollar this week, its strongest since September, and appreciated 6.7 percent in 2017
    • The PBOC “would appear to be drawing a line in the sand at the 6.50 level,” Teck Leng Tan, an analyst at UBS Wealth Management, wrote in a note Tuesday.
  • Separately, the Philippines and Thailand said last week that they were prepared to step in to manage volatility. The Thai baht strengthened about 10 percent in 2017 as foreign funds plowed cash into the nation’s bonds

Source: Bloomberg