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Under the Banyan Tree – Unexpected moves in Asian FX
419 Plays1 day ago
Fred Neumann welcomes Head of Asian FX Research Joey Chew to the podcast to discuss the impact of the energy squeeze on the JPY, what's keeping the RMB on the up and how the KRW has lost steam despite a Korean economy on fire.
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Transcript
Introduction: Impact of Geopolitics on Asian Currencies
00:00:00
Speaker
How is geopolitics shaping the direction of Asian currencies? Why is the Korean one so weak at the moment? And could the Chinese renminbi be the rising star of Asian FX in 2026? Answers to all those questions coming up right here under the banyan tree.
Factors Influencing Asian Currencies: Energy Crisis and Geopolitical Risks
00:00:26
Speaker
Welcome to Under the Many Entry where we put Asian markets and economics in context. I'm Fred Newman at HSBC here in Hong Kong and we've had big swings in Asian foreign exchange markets in recent weeks and months and here to make sense of all of that I'm joined by our head of Asian FX research, Joey Chu. And among the questions we're asking today is how are Asian currencies faring amid all the energy crunch and that geopolitical risk that seen in recent months.
US Dollar Strength vs. Asian Energy Importers
00:00:57
Speaker
So with that in mind, Joey, welcome to the podcast. You're a regular contributor here, of course, a regular guest. And you're our a guru when it comes to Asian currencies. But to set the scene, Joey, um help me understand, you know, we have a lot of geopolitical risk at the moment. We have spiking energy prices. And how should we think about the role of the US dollar? Generally, it's like a safe haven currency tends to do better when there's global risk. Is that something that we've seen in recent months that the dollar actually benefited, quote unquote, from some of that heightened geopolitical risk and the energy crunch that
Challenges for the Japanese Yen and Korean Won
00:01:34
Speaker
we've seen?
00:01:34
Speaker
Yes, Fred. I mean, the dollar has actually done pretty well. and This is not really entirely because of risk sentiment being weak, because actually since the ceasefire announcement, we can see global equity markets doing really well, making all-time highs, etc. But I think the dollar has remained supported because it is energy self-sufficient. The U.S. economy is energy self-sufficient. Whereas in contrast, most of Asia are net energy imports as a especially from the Middle East, where the supply disruption is very acute. So that is the primary difference that that makes ah you know the dollar stand out against Asian currencies. That's very interesting. So you're saying it's not just geopolitical risks that's benefiting the US dollar, but also just the fact that the US is now an energy exporter. And of course, when there's higher energy prices, those economies that export energy benefit and those that import energy feel a drag. And that's why you see differentiation and that helps the US dollar. I want to discuss Asian currency specifically and and one currency that stands out is the Japanese yen which has come actually under pressure. Historically actually it was a currency that also benefits from geopolitical risk. But the yen has been under pressure for a while. The yen has weakened again and despite the fact that the authorities reportedly intervene in the foreign exchange markets, to support the yen, there's still a bit of a headwind for the Japanese yen. Why is the yen not benefiting, quote unquote, from this geopolitical risk like it would have in previous decades?
China's Currency Strength and Economic Strategies
00:03:06
Speaker
Yeah, I mean, first of all, this geopolitical crisis does have a lot of oil implications that might be slightly different from other geopolitical crises in the past. and Japan is a huge net oil importer. So that is, ah you know, one issue here that makes a little bit different. The second issue is that actually the Japanese yen was already under pressure since maybe the fourth quarter of last year. This underlying issue is about the concerns that investors have about the new government, how they're going to spend and how they're going to raise funds. And in fact, if you think about it, ah you know Japan is actually trying to subsidize their population. and shield the population against the rise in oil prices. So these subsidies is actually generating even more fiscal expenditure that needs to be funded. So the fiscal concerns are not only not going away, they have increased because of the oil crisis.
00:03:56
Speaker
That's interesting. so you're saying Japan, a large energy importer is is you know suffering currency terms because it's importing more oil. In addition to that, you highlight some of the fiscal risks that have come in. That is sort leading investors perhaps to take a bit of a more cautious look at the the Japanese yen. That, of course, has also implications for the central bank. The central bank may need to tighten monetary policy. A weaker currency always means inflation is going up. So It probably also has some implications of how we so think about central bank policy going
Asian Currencies Amid Economic and Fiscal Challenges
00:04:29
Speaker
forward. Now, we got um it's Japanese yen weaker, but another currency that has been extraordinarily weak, and is this is a bit of a surprise, Joe, and help me understand that, Korea. Now, Korea, just to set the scene, its semiconductor sector is on fire. I mean, the AI hardware boom is driving up. The demand for semiconductors, semiconductor prices are going up. I mean, the equity market is up over 100% at the time of this recording year to date. an Absolutely stunning move. um So actually, one would expect, wow, exports are doing well, semiconductors are doing well.
00:05:05
Speaker
Korea's equities are doing well. Generally speaking, investors would buy that currency because it signifies strength.
Future Volatility in Asian FX Markets
00:05:11
Speaker
But we've seen this weakness come through in the Korean one. What's going on? Why does my economics training not help me understand why this currency is so weak?
00:05:22
Speaker
Yeah, it's really ironic for Korea. So the equities so market has done so well, that's actually led to ah profit taking and therefore outflows by foreign investors. So as you mentioned, the Korean equities is up 100%. It has outperformed, you know, NASDAQ or even Taiwanese equities, similar type of markets. And so therefore, there is this profit taking, this need to rebalance towards other markets. So that is what we have seen. And the outflows by foreign investors have been so large that they have actually overshadowed even the very large trade surplus that Korea has been getting.
00:05:59
Speaker
So this is fascinating. So because the stock market is doing phenomenally well, foreigners are selling the stocks, they're taking profits, taking the money out of Korea. And the money they're taking out of Korea, ah selling Korean won, buying US dollars, is more than Korea earns on selling all these chips to the world and hence the currency is weakening. It's absolutely extraordinary. Now, how much do foreigners actually own in Korean equities? Do we have some estimates around this?
00:06:26
Speaker
Yeah, so they own about close to 40% of the market, right? So that is already a lot. so in some sense, you could say that they are already, you know, they've already bought a lot of Korean equities and they do not need to buy more. So as the when Korean equities continue to outperform, they might actually want to scale back their investments.
00:06:47
Speaker
So here, in some sense then, because foreigners have already bought so much and Korea is going up, they're actually selling. So Korea is almost ah the victim of its own success in terms of currency terms because it's you know weighing on the currency despite
Conclusion and Future Discussions
00:07:00
Speaker
this extraordinary – performance of the economy. That's ah a very unusual case, I think very interesting case. I think ah it's fair to say, Joey, that you and I in our career, mine's been longer than than yours because you're still very young. But we've never really seen such a phenomenon on this scale. I think it's it's unprecedented.
00:07:20
Speaker
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00:07:32
Speaker
Now back to today's episode.
00:07:39
Speaker
let's Let's maybe ah swerve towards the mainland Chinese currency, the renminbi. And even as sort of neighboring currencies have come under pressure, Japanese yen, we just discussed this, the Korean won, and others in Southeast Asia as well. Actually, the Chinese currency, the mainland Chinese currency has done relatively well. It's actually climbed a little bit against the US dollar. This is a counter trend to the rest of Asia. Is that something you think will continue? What's driving that?
00:08:08
Speaker
Yeah, the Chinese RMB is actually behaving as if is a net oil exporter, but it is not. It's actually also a very large net oil importer. However, the difference between China and the rest of Asia is that it has a lot of oil inventories. It stockpiles so much energy and fuel that it is able to run down its inventories rather than import expensive oil at this current juncture. So therefore, It has behaved as if it is not affected by ah this high oil energy prices. Moreover, there are also other reasons why the RMB has done better. you know One is to do with what we call de-dollarization. So this word has been thrown around a lot. But actually, this phenomenon is really only seen in China. Elsewhere, in the rest of the world, we still see other countries, other investors still buying U.S. assets. But it's only in China that we see Chinese residents, Chinese investors have been shedding U.S. assets. And they've been trying to diversify into either other assets such as gold, if not actually buying back domestic assets. So, for example, we see more conversion of ah you know, the dollar revenue by Chinese exporters into the Chinese yuan.
00:09:17
Speaker
So really, I've done two factors here. One is oil. um Even though China is an oil importer, because they have such a strong energy security system, the currency behaves like i was an oil exporter, not an importer, giving its strength. But he also suggested there's a more longer-term trend here, and that is that actually Chinese investors are buying back their currency, and there's a mini kind of diversification out of the U.S. dollar back into the domestic currency, which is providing strength. Now, I should add that from an economic side, um even though we have seen the Chinese currency strengthen, actually Chinese exporters are not losing competitiveness. They can take the stronger currency in their stride because they are essentially gaining competitiveness and therefore market share because of such enormous increases in productivity.
00:10:07
Speaker
Well, that's also a very interesting currency move. So we we talked about the Japanese yen. We talked about the Korean won and of course the Chinese renminbi. It's interesting that you see currency weakness in places that are doing very well like Korea, but also in economies that are bit more challenged fiscally, for example, Indonesia and Japan. But on the other hand, mainland China's currency is doing better as well. So plenty of differentiation, different drivers of currency momentum. Now, as a last question, Joey, when you when you take a step back and you look you know you look at what's happening in foreign exchange markets, does it feel like an environment where we have a bit more smooth sailing in the coming months when we head into the summer? Or is it going to be one where you think, well, volatility is probably here to stay because there's so much going on in the world economy that, that you know, We will be close to our screens watching those markets because you know markets react and there's just too much going on for a bit of calmness to return.
00:11:08
Speaker
I think there's still going to be quite a lot of volatility in the first place. We still do not have a proper resolution of what's going on in the Middle East. So oil prices, the headlines are still going to move the market. And, you know, in the second, even if we get that out of the way, a the U.S. economy has actually shown remarkable resilience. So that has made a lot of market participants really think about but what they think the U.S. Federal Reserve will do with interest rates. And that will also affect affect how market thinks about the dollar and how market thinks about the rest of emerging market currencies. So all these, are I think, are sources of volatility that will continue for the rest of the year for Asian currencies. Yeah, and then we, of course, might have some additional U.S. tariffs come in as well. Again, we got the headlines just recently coming through. Joey, that just means we got to invite you back to make sense of it all, of the Asian currency landscape. Always a pleasure talking to you. And um have a good summer if we don't speak before. But um I'm sure we're going to check in with you here under the banyan tree very soon.
00:12:10
Speaker
Thanks. Thank you.
00:12:15
Speaker
Well, that's it, folks. That was our discussion with Joey Chu, our head of foreign exchange research based in Singapore. And thank you very much for joining us. As always, please do listen, like and subscribe wherever you get your podcasts to the Under the Banyan Tree podcast.
00:12:31
Speaker
Also listen to the Macrobrief wherever you get your podcasts. See you again next week.