Transcript
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Speaker: Welcome to Under the Banyan Tree, where we put Asian markets and economics in context.
Speaker: I'm Fred Newman, chief Asia economist here in Hong Kong, and today we're putting FX in the spotlight.
Speaker: It's a multi-layered story touching on trade, politics, inflation, interest rates and much more.
Speaker: And my special guest is Joey Chu, our head of Asian FX research based in Singapore.
Speaker: We'll be discussing what we've learned about the region's key currencies this year and what the Asian FX landscape would look like in 2025.
Speaker: Let's get a conversation started right here under the Banyan Tree.
Speaker: Let's start with some numbers to set the scene for FX here in Asia.
Speaker: Obviously, the US dollar is a global currency benchmark, and practically all the region's currencies this year have fallen against it.
Speaker: Maine and China's RMB is down around 2% since the start of the year.
Speaker: The Taiwan dollar is down more than 5%, and the Japanese yen has actually fallen
Speaker: by 7.5% against the greenback this year.
Speaker: So let's bring in Joey Chu to help us understand the bigger picture.
Speaker: Joey, welcome to Under the Banyan Tree.
Speaker: Thanks, Fred, for having me.
Speaker: So, Joey, you are a veteran of looking at Asian currencies, the ups and downs, left, right, you know, and center, all the movements closely tracked by you and your team.
Speaker: But let's look at some of the sort of headlines that came through recently.
Speaker: You saw sort of this headline that the dollar has been very strong, particularly since the U.S. presidential election in early November,
Speaker: And of course, the dollar was strong against Asian currencies in particular.
Speaker: Can you put this in perspective?
Speaker: How strong has the dollar really been against Asian currencies?
Speaker: Or put another way, how weak have Asian currencies really been against the dollar?
Speaker: Was it sort of a big shock that surprised you?
Speaker: Or do you think it's, well, sort of a manageable move overall?
Speaker: I would say that no, it's not been surprising.
Speaker: And I say that because a lot of Asian currencies are still within the range that we have seen them in over the last few years.
Speaker: Actually, a lot of them have not made fresh lows against the dollar.
Speaker: So for example, if you look at the dollar CNY, that's the renminbi, that's the Chinese currency.
Speaker: It is actually at a level today that is still slightly below the level that it was at, say, in July.
Speaker: when the Chinese renminbi was going through strong depreciation pressures as well.
Speaker: That's interesting.
Speaker: So you're saying that it's not actually against Asian currencies that the US dollar has been that strong.
Speaker: There's been other currencies outside the region that have actually seen bigger moves than those in Asia.
Speaker: What might those be?
Speaker: Indeed, I think some of the most obvious currencies that have suffered from this bout of recent dollar strength is actually the euro.
Speaker: So the euro, for example, has broken out of its familiar 105 to 110 range and is actually now trading below 1.05.
Speaker: So that's interesting.
Speaker: So euro obviously trading weaker, but Asian currency is holding up relatively better.
Speaker: But still, we have a strong dollar and we are in a strong dollar world.
Speaker: But explain to us why would the presidential election and we have a new incoming president, of course, next year.
Speaker: Why is there an expectation that maybe under a Trump presidency, you might see a stronger dollar than you might have seen
Speaker: if another candidate won the US presidential election?
Speaker: Right.
Speaker: First of all, actually, the dollar was already in its strengthening phase in October.
Speaker: So even before the US election, we already started to see some strength in the dollar coming back.
Speaker: And that was after a very weak third quarter or summer when the Fed started cutting rates.
Speaker: And the reason for this rebound the dollar was actually because of this
Speaker: idea that actually the US economy is not doing too badly after all.
Speaker: We started to see a lot of data surprises from the US coming out stronger than expected.
Speaker: At the same time, inflation also started slowing at a slower pace than before.
Speaker: And so the combination of this was already leading people to reassess what they think the Federal Reserve will do going forward.
Speaker: And then come the US election results, and I think the Republican clean sweep brought upon this idea that there are a lot more possibilities in terms of policy changes.
Speaker: For example, in terms of fiscal policy or things like trade policy, a lot of this could have inflationary implications for the US economy.
Speaker: So that also brought about another reassessment of what the Fed would do next year.
Speaker: In terms of tariffs, as we know, a lot of these would directly affect some of the exporting currencies, exporting economies, and that tends to lead to a weakening of their currencies against the dollar.
Speaker: So that's also another angle that sort of new, fresh perspective after the US election.
Speaker: So that's interesting you're saying partly sticky inflation in the U.S., the expectation of maybe a higher interest rate than otherwise one would have expected.
Speaker: And maybe some of the trade restrictions that might come in, all of them in the short term at least favor a stronger dollar.
Speaker: Now, that's the dollar part.
Speaker: But I also want to talk about some of the Asian currencies in particular, because you said something interesting, and that is that if you have tariffs being imposed on an exporter, usually the currencies tend to weaken against the U.S. dollar.
Speaker: Now, why is it, do you think, that we haven't seen, therefore, Asian currencies weaken as much as one might think if there is indeed trade restrictions coming in?
Speaker: I think it is because we actually have not seen that much concrete details around this idea of tariffs yet.
Speaker: I mean, so far, we are operating on assumptions that they're going to come, but the timeframe and the magnitude of the tariffs and also which economies are being targeted, all this are still very uncertain.
Speaker: But already, we are starting to see some currencies react to that possibility.
Speaker: But all things considered quite modest because the details are still missing at this juncture.
Speaker: Now, that's, of course, the tariff angle, and that's very difficult to kind of precisely say, oh, there's going to, first of all, be applied next year and what the impact is.
Speaker: But there is also another reason, I think, to expect maybe some pressure on Asian currencies, and that is that the interest rates here remain a lot lower in many cases than in the U.S.,
Speaker: Mainland China, for example, interest rates still very low compared to the U.S. Is that kind of adding to this view that maybe there's still a stronger dollar, particularly against the Chinese currency?
Speaker: Yeah, for sure.
Speaker: Actually, practically the whole of Asia is lower yielding than the US dollar, except for maybe two or three currencies.
Speaker: They have higher interest rates than the US dollar.
Speaker: But even then, we see across the board in Asia, this idea or this concept of accumulation of foreign assets.
Speaker: This could mean capital outflows from residents to buy US dollar assets,
Speaker: We also see FX deposits onshore in these Asian economies rising over the last few years.
Speaker: At the same time, we're seeing less capital inflows from global investors into Asia because some of these inflows have been attracted to the US instead.
Speaker: So the combination of all these flows is that Asian currencies have actually been under depreciation pressure.
Speaker: We've already been seeing this for the last two or three years, and I think this will likely remain a theme in 2025.
Speaker: That's interesting.
Speaker: One last question before we go to a quick break.
Speaker: You said this was a theme already the last few years and might remain in place.
Speaker: What would it take to change the direction?
Speaker: What would you think might change the overall direction at some point?
Speaker: The dollar cannot be strong forever, right?
Speaker: At some point, it's got to be maybe a correction.
Speaker: Is it really this idea that you see rising inflation, rising interest rates in Asia that sucks capital back into the region now?
Speaker: Is it interest rate cuts in the U.S.?
Speaker: Is it both needs to happen at the same time?
Speaker: What are you watching for a signal that kind of can reverse the strong dollar trend against Asian currencies?
Speaker: I think we need both external as well as domestic factors.
Speaker: So externally, you know, the Fed continuing to cut rates, that will be very helpful.
Speaker: Locally or regionally in Asian economies, I think some kind of combination of fiscal policy or more policies that stimulate growth will be very helpful because
Speaker: as we know, Asian currencies, or at least for Asian capital markets, it's not just about the interest rates.
Speaker: For a long time, Asia interest rates have been quite low.
Speaker: And yet, in the past, there was still capital inflows into Asia because of this idea of growth differential, because the potential growth in Asia in the past has always been quite strong.
Speaker: I think we need to see that kind of optimism come back.
Speaker: And that could come from, say, fiscal policies or other structural reforms.
Speaker: So if I'm proving the growth outlook that would make you change your view, let's take a quick break here.
Speaker: And I want to talk a little bit more about the Chinese currency, but also some of the other currencies in Asia, including the Japanese yen.
Speaker: So we'll be right back after this break.
Speaker: So welcome back, everybody.
Speaker: And just before the break, we talked to Joey Chu, our Asia FX strategist based in Singapore, about the strong dollar and what's driving that and what it would take to kind of reverse that trend.
Speaker: Joey, I wanted to ask you one question, and that is we often talk about Asian currencies overall.
Speaker: But really, the one thing that matters surely is the dollar versus the renminbi.
Speaker: To what extent do other currencies in the region kind of track, if you will, that particular axis of the U.S. dollar versus the Chinese currency?
Speaker: Does the Chinese currency set the pace for other currencies in terms of how they trade against the U.S. dollar?
Speaker: Yes, Chinese renminbi is a very important driver of the rest of Asia for a few reasons.
Speaker: One is the underlying economic relationships, be it through trade or services, things like tourism, or because of FDI or competitiveness.
Speaker: These are all the reasons for why Asian currencies tend to sort of move together.
Speaker: But I think the other reason is to do with sentiment.
Speaker: So from global investors' perspective, they tend to trade Asia together.
Speaker: So China is such a big part of the Asian economies by GDP.
Speaker: So the sentiment sort of drives how they think about Asia in general.
Speaker: That's interesting you say that.
Speaker: And I'm going to date myself now because I remember a time when the renminbi wasn't the pay setter.
Speaker: It was a Japanese yen.
Speaker: And now I've been in markets, I think, a little bit longer than you.
Speaker: You might not remember that time necessarily.
Speaker: But be that as it may, is the yen still relevant for Asian currencies and setting the pace?
Speaker: Or are we just looking at the Chinese renminbi nowadays?
Speaker: I think the yen can be important and I think we saw that importance sometime in July and August when the yen had a very sharp move.
Speaker: The yen suddenly appreciated some 10% and then its move eventually reverberated through Asia through this process called carry trade unwind.
Speaker: So the idea is that a lot of people fund their risky trades via yen because it's such a low interest rate currency.
Speaker: And so when the yen suddenly appreciates, a lot of these trades that are funded out of the yen suddenly becomes non-viable.
Speaker: So they had to be closed out.
Speaker: And so that leads to a lot of contagion and spillover effects across Asia, across global financial markets.
Speaker: So to that extent, the yen is still very important.
Speaker: But as you alluded to, in terms of the underlying economic relationships, a lot of currencies take their day-to-day movements from the renminbi.
Speaker: So there you have it, ladies and gentlemen.
Speaker: As Joey Chu just said, the renminbi is still very important for Asian currencies.
Speaker: But of course, at times, the Japanese yen is quite relevant as well in Asia.
Speaker: Now, Joey, last question.
Speaker: You've obviously had tremendous experience in Asian FX markets.
Speaker: When you think about the coming years or year even, we're going now into the year of the snake in Asia,
Speaker: There's so much going on in the world these days.
Speaker: It feels like everything is sped up, geopolitical risks and, you know, the political noise is getting louder.
Speaker: Do you see more volatility in financial markets as a result?
Speaker: Are things moving faster or...
Speaker: Is it sometimes the noise is out there, but really FX always trades on these fundamentals?
Speaker: Or are you and your team sitting nowadays even closer to your screens and daily moves you're seeing currently on FX markets?
Speaker: No, I mean, definitely, I think the volatility is very high in the financial markets, in FX markets, and it's getting very unpredictable because, you know, we now have to pay attention to headline risk, right?
Speaker: So it's not just about the underlying economic data.
Speaker: We also have to think about, you know, the headlines coming out from the US, from policymakers, and then in Asia, how their own policymakers react to those headlines coming out from the US.
Speaker: It's definitely going to be a wild ride in 2025.
Speaker: So it sounds like a busy year for you, Joey, in a year of the snake.
Speaker: Busy year for all of us, I think, whether we economists or strategists.
Speaker: So enjoy maybe a little bit of a nice break towards the year end because buckle down when it comes to 2025.
Speaker: Thanks a lot for joining us, Joey.
Speaker: Absolutely.
Speaker: Thank you very much.
Speaker: Well, folks, we're going to have to call it a day here.
Speaker: Thank you very much as ever for listening to Under the Banyan Tree.
Speaker: It's been a pleasure having you with us.
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Speaker: That's a wrap for now.
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