Asia is in a good position to ride out interest-rates hikes from the Federal Reserve, given prospects of a weaker dollar and a solid outlook for exports, according to Christy Tan, National Australia Bank Ltd.’s head of markets strategy in Singapore.
In three of the last four Fed tightening cycles, the dollar has weakened, a pattern that bodes well for a basket of Asian currencies that’s already rising against the greenback this year, said Tan. While that would ordinarily reduce the competitiveness of export-reliant economies in Asia, strong global growth is keeping demand buoyant, she said.
“If you look at what led to the Asia recovery recently, it’s actually exports,” said Tan. “It basically shows the currencies aren’t overly priced. And demand globally is recovering quite strongly, so much so that maybe the price effect is more or less diluted.”
For Asian central banks, that means less pressure on them to move in lockstep with the Fed. An ongoing search for yield and a healthy macro-economic outlook puts policy makers in a “sweet spot,” and while they can hike interest rates if they need to, there are no signs of overheating that require more urgency, Tan said.
Investors should also keep an eye on the “twin deficit” in the U.S., Tan said, with government spending projected to increasingly dwarf revenues and imports continuing to vastly outpace exports. Markets could all too easily understate the weakness in the U.S. dollar going forward, she said.
“When the twin deficit mattered more, the dollar doesn’t seem to respond as greatly to the rate hike tightening cycle,” she said of the last few Fed rate-hike cycles.
Greater spending on services, including online, has removed a bit of the currency performance impact on external trade, Tan said.
“All this makes Asia look stronger in terms of providing some kind of a shock buffer to a tightening environment,” she said.