Transcript
Speaker: Welcome to HSBC Global Viewpoint, the podcast series that brings together business leaders and industry experts to explore the latest global insights, trends, and opportunities.
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Speaker: Hello from Hong Kong.
Speaker: I'm Fred Newman, Chief Asia Economist at HSBC, and you're listening to Under the Banyan Tree, where we put Asian markets and economics in context.
Speaker: On today's podcast, what does a stronger dollar mean for currencies here in Asia?
Speaker: Our FX team now sees gains for the greenback throughout 2024 against consensus, it's worth noting.
Speaker: Joining me in the studio today is Head of Asia FX Research, Joey Chu.
Speaker: Let's get the conversation started right here, Under the Banyan Tree.
Speaker: Let's start with some context on the FX markets.
Speaker: It's been a choppy year for the dollar, which started losing steam around October last year.
Speaker: But in the past few months, it's actually regaining momentum appreciating against other currencies.
Speaker: U.S. interest rate hikes have slowed this year, of course, but interest rates in the U.S. are expected to remain elevated for some time.
Speaker: And that, of course, supports the U.S. dollar.
Speaker: And as a result, Asian currencies have fallen significantly.
Speaker: weighed down also by slowing growth, in particular in mainland China.
Speaker: So now the question is, will higher interest rates in the US trigger really another bounce in the US dollar against Asian currencies?
Speaker: Or have we seen sort of the most of the strength of the greenback against Asian currencies?
Speaker: Let's ask our head of Asian FX research, Joey Chu.
Speaker: Joey, welcome to the podcast.
Speaker: Thanks, Fred.
Speaker: Very nice to be here.
Speaker: Joey, we've seen a Federal Reserve that does not look like it's in a position to cut rates anytime soon.
Speaker: Of course, there's a debate whether it might hike further or not, but it looks at least that we see elevated U.S. interest rates for quite a considerable period here.
Speaker: How does that impact, in your view, Asian foreign exchange rates?
Speaker: Because, of course, we've seen a big appreciation of the US dollar.
Speaker: Dollar strengthened quite a bit.
Speaker: Do you see this appreciation against Asian currencies by the US dollar to run much further, given the Fed is relatively still hawkish?
Speaker: Asian currencies as a block are low-yielding in nature.
Speaker: There are only three of them that have higher yields than the US dollar.
Speaker: And that's Indian rupee, Indonesian rupee and the Philippines peso.
Speaker: Everybody else has much lower yields.
Speaker: As such, if US yields remain at this level, the dollar remains strong.
Speaker: It's very hard.
Speaker: It will be a huge struggle for Asian currencies.
Speaker: That being said, they have already depreciated a lot here today, much more so than European currencies.
Speaker: So I think it's now time for the European currencies to catch up to the kind of weakness Asian currencies have already seen.
Speaker: So you reference weakness in Asian currencies.
Speaker: To some extent, that's probably positive because it adds more competitiveness to some of the exporters.
Speaker: On the other hand, of course, there's a risk of imported inflation going up.
Speaker: Do you see central banks kind of resisting currency weakness in Asia a little bit?
Speaker: They have been actually to varying degrees, but a lot of them have been sort of resisting and pushing back either through adjusting their interest rates in the money market or selling FX reserves or using other window guidance on exporters or on banks.
Speaker: We see that especially in China.
Speaker: So you referenced the fact that dollar strength is already in the price.
Speaker: So the Federal Reserve's high interest rates are in the price, even though Asian central banks have resisted depreciation.
Speaker: Really, we've had already quite a bit of FX weakness in Asia.
Speaker: Let's talk a bit about individual currencies in the region.
Speaker: And China's currency, obviously, is front and center.
Speaker: It dictates the pace a little bit for the region.
Speaker: We've seen a bit of a slowdown in the depreciation stabilization come in.
Speaker: Is that your expectation going forward, or do you see renewed pressures on weakness developing anytime soon?
Speaker: I think the pressures on the RMB are constant and persistent.
Speaker: However, I think the resistance by the central bank can vary, and right now we're seeing it very intense.
Speaker: So we classify this as like a tug of war, whereby PBOC, there's a central bank on one side, and on the other side, there are many, many opponents, shall we say.
Speaker: And so the PBOC has to exert a lot of effort to keep this currency stable.
Speaker: And right now we're seeing a lot of this effort in the sense of, for example, much lower dollar CNY fixing.
Speaker: This is a reference rate that helps determine the ceiling for dollar CNY, how much it can rise.
Speaker: So the central bank is using these fixings, which are daily kind of where it goes out of the market and says this is the exchange rate as a signal to the market that it kind of is leaning towards currency stability rather than necessarily further adjustment.
Speaker: The Chinese currency is obviously very important for the region overall.
Speaker: How much of a pay setter is the Chinese currency for other currencies across the region?
Speaker: Largest economy in Asia, right?
Speaker: Everybody looks to China.
Speaker: It's a very important export market.
Speaker: Does the Chinese currency pace of depreciation and appreciation kind of influence that of other currencies in the region as well?
Speaker: Definitely, because China is the largest export partner for a lot of economies in Asia, especially in ASEAN.
Speaker: But even, you know, for example, India and Indonesia, they are not exactly export oriented.
Speaker: But still, they sometimes follow the RMB, especially when the RMB's depreciation is very sharp, such that it triggers risk aversion.
Speaker: So we can speak of sort of a CNY block or Chinese currency block, that the kind of region follows the Chinese currency.
Speaker: It used to be the yen that sort of set the pace a little bit in Asia.
Speaker: So you're really seeing a change here in terms of what's driving FX market.
Speaker: Is that right?
Speaker: I think the yen is still important.
Speaker: The yen is also important for the RMB.
Speaker: So you can say that the influence is sort of indirect now through RMB and then from RMB to the rest of Asia.
Speaker: At the end of the day, the one that is still most important for all Asian currencies, including the RMB itself, is actually still US yields and US dollar.
Speaker: In some sense, RMB's issue right now is mirrored across a lot of Asian currency.
Speaker: So it's difficult to separate out what exactly is the impact of the RMB's weakness or the RMB's weakness as a result of high US yields, which is also affecting everybody else.
Speaker: So it all comes back to you as interest rates at the Fed.
Speaker: This is where we started.
Speaker: But talk to me a little bit about the yen.
Speaker: Obviously, it's still a major currency in its own right.
Speaker: And we've seen quite a bit of weakness over the past year, partly, of course, because the Bank of Japan is still very much in an accommodative mode, hasn't joined other global central banks in tightening monetary policy.
Speaker: And it doesn't look as if the Bank of Japan was about to raise interest rates very sharply.
Speaker: Does that leave you towards maybe expecting more currency weakness around the Japanese yen?
Speaker: In some sense, the Japanese yen was the first to depreciate amongst all Asian currencies in a very material way.
Speaker: And right now, it's so significantly undervalued, it's very hard for us to picture even more undervaluation.
Speaker: But that being said, it's also very hard to reverse this yield differential pressure on this currency.
Speaker: So I think right now, the only resistance is offered by the threat of intervention.
Speaker: I suppose when the currency is so undervalued as it is right now, there are a lot of costs to the economy that the authorities must be thinking about.
Speaker: So the types of intervention, of course, we talk about with regards to Japan would be outright effects intervention that is buying and selling dollars in the market.
Speaker: It could also be actually some signals from the central bank itself that is thinking about tightening monetary policy, which would be more of a verbal intervention.
Speaker: What type of intervention are you thinking about which could potentially come back in?
Speaker: I think definitely outright selling of US dollars and buying of Japanese yen by the Ministry of Finance would be very powerful.
Speaker: They did that last year.
Speaker: It was a huge trigger for the market.
Speaker: It led to a lot of positions, adjustments in the market because everybody was already short yen and they were caught off guard by the big move by the Ministry of Finance.
Speaker: So something similar could happen again.
Speaker: Of course, that's a reminder that not all economies welcome exchange rate weakness, you might think, because it helps their exports.
Speaker: But there's also too much of a good thing, which is too much weakness raises inflation, for example.
Speaker: Let's take a quick break there.
Speaker: And when we come back, we talk about some of the other currencies in Asia.
Speaker: And also I want to ask Joey about currency internationalization, that is the broader use of some of the Asian currencies in the national trade, for example.
Speaker: Okay, Joey, picking up for where we left off just a moment ago, we have obviously talked about the low-yielding currencies.
Speaker: It is currencies in Asia that have low interest rates relative to the U.S., Japan, classic case.
Speaker: The Chinese currency, obviously, as well.
Speaker: There are a few others that fall in that basket.
Speaker: Korea, for example, Thailand.
Speaker: But what about the higher-yielding currencies, the currencies with higher interest rates?
Speaker: So you mentioned three currencies.
Speaker: Philippine peso, the Indonesian rupee, the Indian rupee.
Speaker: Do they have, because of higher interest rates, a better chance to kind of resist that broader weakness that we see in other Asian currencies?
Speaker: Does the higher interest rate, does it help these currencies or not as much?
Speaker: Actually, it has year-to-date.
Speaker: As a block, these three of them have performed better than the other currencies in Asia.
Speaker: They have depreciated less.
Speaker: That being said, we need to make a distinction between these so-called high-yielding currencies in Asia compared to their counterparts, say, in Latin America.
Speaker: Because the yield differential, even for these three currencies against the US, is so small.
Speaker: On average, it's only 70 basis points.
Speaker: This is not enough to compensate for the risks that they face.
Speaker: For example, from risk appetite being unstable, from high oil prices.
Speaker: In the first place, all three of them run trade deficits.
Speaker: So high oil prices will exacerbate their trade deficit.
Speaker: So this yield differential might not be sufficient to offset the risks.
Speaker: Obviously, yield differentials, which is the difference in interest rates between a local currency and the US dollar, still one of the key driving forces in global FX markets.
Speaker: But you also hit on trade as an important secondary driver to FX movements.
Speaker: You referenced oil, and I just wanted to ask you on this because we've seen oil recently becoming much more expensive.
Speaker: You're going over $90 per barrel at the time of this recording.
Speaker: Which economies in Asia, from an FX perspective, do you think are most exposed to a rise in oil prices?
Speaker: Actually, nearly all Asian economies are net oil importers.
Speaker: I think the only exception is Malaysia, and to some extent Singapore, but only because it has a large refinery sector.
Speaker: But everybody else is very much exposed to higher oil prices through trade deficits or higher inflation.
Speaker: So in some sense, this is definitely not an additional headwind, shall we say, for their currencies.
Speaker: And often India is mentioned in this context.
Speaker: Is that a particular headwind for the Indian currency, given it has high interest rates?
Speaker: So does it really affect India then, the Indian European?
Speaker: It definitely does.
Speaker: The trade deficit has already widened a lot, even before this recent rise in oil prices.
Speaker: Also, inflation has sort of come back in India as well, even before this rise in oil prices.
Speaker: So you can imagine this.
Speaker: Two headwinds would just be exacerbated by the most recent increase in oil prices.
Speaker: So many things driving exchange rates across Asia, of course, the Fed with higher interest rates.
Speaker: Then we have oil prices, all of it, which might to some extent be in the price, but clearly still uncertainty out there in markets.
Speaker: I wanted to shift gears very quickly and ask you about these efforts to internationalize these currencies.
Speaker: This is a term we hear a lot about.
Speaker: What does this mean in a nutshell when we talk about currency internationalization?
Speaker: It's talked about
Speaker: with respect to the Chinese currencies being talked about, with respect to the Indian rupee, for example, lately.
Speaker: What does this mean, really, when we talk about currency internationalization?
Speaker: I mean, simply put, it means to use their own local currency in international transactions as opposed to, say, the US dollar.
Speaker: This is something that has been underway for China for some time now.
Speaker: In some sense, we've seen some progress.
Speaker: The Chinese data suggests that about 25% of their own trade is now invoiced and settled in the RMB.
Speaker: as opposed to say maybe just 5% before the whole internationalization drive started.
Speaker: So this is progress.
Speaker: And why is that an advantage for a country the more trade is settled in their own currency?
Speaker: Well, I think first of all, it takes away some of the dollar demand from importers.
Speaker: Second, it just reduces the FX hedging requirements by the local corporates.
Speaker: So they shift their hedging from local corporates to the foreign trade partners that now have to buy and sell an RMB.
Speaker: So you said China is doing this for quite some time, is obviously more advanced in this internationalization process.
Speaker: What about India?
Speaker: India, we've seen recent headlines as well, trying to encourage the use of the rupee.
Speaker: Has that made a lot of headway yet or are we at the very beginning of that process?
Speaker: I think India is much earlier in its efforts and process.
Speaker: Right now, I would say it's more regionalisation.
Speaker: We're seeing Indian rupee used a little bit more in the South Asia countries, but not exactly across the world and across other parts of Asia yet.
Speaker: So plenty of developments in Asian FX markets, not just in terms of exchange rates, but also the increased use of Asian currencies in international transactions.
Speaker: Joey, this was extremely insightful.
Speaker: Thank you very much for joining us.
Speaker: But before I let you go, you were a Singapore national.
Speaker: You've been here in Hong Kong for how long?
Speaker: How many years?
Speaker: Coming to 10 years.
Speaker: 10 years.
Speaker: But we're glad to have you in the studio here today under the banyan tree because you're moving back to Singapore.
Speaker: You're looking forward to return home?
Speaker: Yeah, very much so.
Speaker: The Singapore dollar has been depreciating.
Speaker: And inflation has become quite high, so it's been quite difficult to move.
Speaker: Right.
Speaker: Well, we'll have you back under the banyan tree.
Speaker: Of course, you're moving to Singapore.
Speaker: You'll continue to head up our Asian FX strategy team from Singapore back home for you, but certainly going to be as present in our research offering on FX as ever before.
Speaker: So thank you, Joey, and hope to see you very soon, hopefully in Singapore.
Speaker: Thank you.
Speaker: And on that note, it's goodbye from all of us here on The Banyan Tree.
Speaker: If you're not subscribed, head to Apple Podcasts or Spotify and follow us.
Speaker: And you can also follow our sister podcast, The Macrobrief, wherever you get your podcasts.
Speaker: In fact, if you want to know more about our change in the view on the dollar, there's a recent episode called Return of King Dollar with our global head of FX research, Paul Mackle.
Speaker: That's a wrap for this week on The Banyan Tree.
Speaker: Thanks for joining us.
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Speaker: We hope you enjoyed the discussion.
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