Fear
has crept into the
foreign exchange markets: fear of central banks.
Currency traders are rapidly shifting assets to countries seen as less
likely to try to weaken their currencies, amid concern that the fresh
round of US
monetary easing could trigger another clash in the “currency wars”.
Fund managers are rethinking their portfolios in the belief that
“QE3” – the
Federal Reserve’s third round of quantitative easing – will
weaken the dollar and
trigger sharp gains in emerging market currencies.
Such moves would cause a headache for central banks worried about the
domestic impact of a strengthening local currency, leading to possible
intervention.
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Some
investors are allocating money towards countries with beaten-up
currencies, such as India or Russia, or those with more benign central
banks, such as Mexico, that
do not have a history of frequent forex intervention.
Currencies whose central banks have either intervened or threatened
to intervene since QE3 have been underperforming the
US dollar as
investors have steered clear.
The Czech koruna is the worst-performing major currency against the
dollar since QE3 was launched this month, according to a Bloomberg list
of expanded major currencies. The governor of the Czech central bank
last week
raised the prospect of forex intervention as a tool to stimulate the economy.
The
Brazilian real is also weaker in the past two weeks after Guido Mantega, finance minister,
made it clear that the government would defend the real from any fresh round of currency wars sparked by the Fed’s move.
Even the Japanese yen is weaker against the dollar overall since the
Fed’s move, despite having clawed back all its losses after the Bank of
Japan’s
move to add to its bond-buying programme last week.
Currency desks at
Baring Asset Management and Amundi are avoiding the
Brazilian real, which the country’s central bank keeps managed at
around R$2 against the US currency, and are instead buying the
Mexican
peso, where the central bank has signalled it is happy for the currency
to appreciate further.
James Kwok, head of currency management at Amundi, said: “Mexico is
an emerging market currency many managers like as they believe the
central bank won’t intervene. The Singapore dollar and the
Russian
rouble are managed by a range, instead of one-way direction, and so are
also good candidates for
QE play.”
He is concerned that another “big scale” intervention from Tokyo is
on the cards after the
BoJ failed to weaken the yen substantially this
month, and is avoiding the currency as a result.
“We definitely take the intervention risk into account when investing
in a currency,” says Dagmar Dvorak, director of fixed income and
currency at Barings. “In Asia, intervention risk is fairly high. We have
still got positions in the Singapore dollar but remain cautious on the
rest of the region.”
Other investors are opting for currencies that have weakened
substantially this year. Clive Dennis, head of currencies at Schroders,
says: “Russia and India have currencies with strong rate support and
levels which remain well below their best levels of the last year, hence
pose less intervention risk. I like owning those currencies in a US QE3
environment.”
Some currencies are strengthening on a combination of Fed easing and
domestic factors. While the Indian central bank is not seen as likely to
intervene to stem any appreciation in the rupee,
the currency has also been popular this month due to a reform package from the Indian government aimed at stimulating the economy.
Commodity currencies including the Russian rouble are responsive to
expectations of a rise in commodity prices fuelled by Fed easing, while
investors view the Mexican peso, along with the Canadian dollar, as a
play on any economic recovery in the US because of their strong trade
links.
However, some investors believe the QE3 effect could be lower this
time. They argue that central banks in emerging markets face a tough
decision over whether to weaken their currencies to help struggling
exporters and stimulate growth, or allow them to strengthen to offset
the impact of rising food prices.
In fact, the US dollar has shown signs of resilience since QE3 as fears over the health of the eurozone continue.
While flows into
EM debt and equity funds rose substantially last
week, according to data from EPFR Global, Cameron Brandt, research
director, says this week’s flows looked more muted: “There’s a certain
amount of reaction fatigue setting in.
By Alice Ross, FT.com
What QE3 means for China and rest of Asia?
China recently announced plans to boost spending on subways and
other transportation infrastructure to boost its economy. But China may
not be as aggressive with stimulus as the Federal Reserve and European
Central Bank.
NEW YORK (CNNMoney) --
Peter Pham, a capital market specialist and entrepreneur with expertise in institutional sales and trading, is the author of AlphaVN.com, an investing blog focusing on Vietnam and other markets in Southeast Asia
Now that most of the developed world's major central banks have
all committed to some form of open-ended quantitative easing, we can
start to make some concrete predictions about the effects this will have
in Asia.
In general, QE is being undertaken in the West to stabilize debt
markets that are deflating. So this may do little to actually stimulate
sustainable economic growth. But, the uncertainty as to whether the
central banks would act aggressively kept a lid on many emerging growth
markets for months. Here's what may happen next.
China has been lowering interest rates but it cannot afford to do
print money to buy bonds like other central banks have done. China's
central bank can still announce more fiscal stimulus due to its strong
trade surplus. The recent plan to spend $156 billion on
domestic infrastructure is significant, but compared to the amount of money the
Federal Reserve and
European Central Bank may wind up spending, it might was well be $156.
The political situation in China is proving to be more volatile
than we may have originally thought as the response to Japan's buying
the Senkaku islands seems completely out of proportion with the level of
threat or even insult this is represents. It speaks to a party that
needs to redirect anger at its own mishandling of the economy.
That this is coming just a few months after Japan and China signed
the most sweeping currency and trade agreement of any that China has
signed with another country seems very odd.
Japan's response to the QE announcement by the Fed was to extend
their existing QE program another 10 trillion Yen (~$128 billion US).
That may sound like a lot but it's even less than China's most recent
stimulus program.
This suggests that the Bank of Japan is uninterested in printing
to oblivion at the same rate as the Fed and ECB, and that Japan will
manage the yen's rise while shifting its focus towards more regional
trade. Japan and China are each other's largest trading partners, which
makes this row over the Senkaku Islands seem manufactured to force the
Japanese to choose a side in the growing cold war between the U.S. and
China.
So far, Japan has been trying to work with both sides. It is
helping to internationalize China's yuan currency and is giving China a
clear alternative to U.S. Treasuries with its own bonds. At the same
time, Japan has stepped up its purchase of Treasuries, buying more than
$200 billion's worth in the past 12 months.
I expect the Bank of Japan to continue to try and position the yen
as an alternative regional reserve currency as other Asian nations like
Thailand, Malaysia and Indonesia try to lessen their reliance on the
U.S. economy.
By keeping the yen strong versus the euro and the dollar, Japan
can attract capital from overseas and use it to deploy it around Asia.
There should be enough money sloshing around the region so that Asian
nations can continue their trade with the West at current levels while
also focusing more on regional growth.
The economies of Indonesia, Thailand and Malaysia are already
growing above expectations this year despite volatility in their
currencies because of the fear over Europe. With worries about Europe
starting to wane, these countries, as well as the best companies in
them, should have little trouble raising capital through bond sales.
The wildcards for Asia are Hong Kong and Singapore. We're already
seeing signs of a property bubble in Hong Kong thanks to the Fed's
four-year old policy of interest rates near zero. That's because Hong
Kong's dollar is nominally pegged to the U.S. dollar.
Now that the Fed has implemented a program that will further
debase the dollar -- and expand its already bloated balance sheet --
Hong Kong is being forced to reassess its currency peg. If they do not
make changes, this could result in an even bigger property bubble. That
would lead to loan problems for Hong Kong banks similar to those
plaguing those in the U.S., Europe, China and, to a lesser extent,
Singapore.
Since the Monetary Authority of Singapore (MAS) pegs its interest
rates to that of the Fed, its economy is vulnerable to a property bubble
like the one in Hong Kong. Inflation is currently above 4% and has
recently been above 5%. While Singapore's banks are all very well
capitalized and their foreign exchange reserves are higher than their
annual GDP, the Fed's QE3 policy will put pressure on an economy already
dealing with sluggish growth.
But all in all, the latest round of QE is mostly bullish for Asia
as it creates some certainty after the past 12 months of extreme
uncertainty. Even though the actions by central banks in the West
appear to indicate that their economies are worse than the headlines
make it seem, the mere fact that the Fed and ECB have acted should
reassure investors throughout Asia.
