A client note from TD on the Chinese yuan highlights KRW, THB and SGD react the most
We have been bearish the CNY on the back of economic dynamics and a divergence with more aggressive Fed monetary policy.
- With sharp CNY depreciation vs. the USD and on a CFETS basis, policymakers appear to have abandoned the strong CNY stance, but have also looked to calm concerns that this is anything more than a fundamental adjustment.
- This risks re-igniting Chinese capital flight pressure, but also regional volatility as the renminbi has acted as an anchor.
- CNY depreciation has helped to drag down asset markets across Asia in a move reminiscent of Aug 2015 and Jan 2016.
- KRW, THB and SGD react the most to CNY gyrations. TWD is likely to be impacted via trade links and PHP, INR and IDR could continue to be hit by deteriorating capital flows.
I bolded that bit on the index (CFETS sets the yuan against a basket of currencies). I have been referring to the yuan weakness against its basket and have felt a bit lonely doing so. I have lost count of the number of 'oh its just USD strength' analysis pieces I have seen … when it hasn't been.
TD confirming I don't need new glasses, thanks.
TD wrapping up:
The bottom line is that the rest of Asia is likely to get increasingly caught up in the wake of CNY depreciation.
- As we've identified, investment and trade channels mean that most of the region is susceptible to China related pressure.
- If China growth concerns intensify the pain will be even worse.
It is no surprise that China is attempting to allay market fears via its calming rhetoric but the job will be much harder when (if) further US tariffs are implemented. Asia will then have to contend with
- higher US yields,
- firm USD,
- trade frictions
- and Chinese growth concerns.
If capital outflows from China accelerate as a result and the CNY comes under further pressure, Asian low yielding currencies, especially the likes of KRW, TWD, THB and SGD will not escape. Those with current account deficits, namely PHP, IDR and INR may also continue to see pain, adding to their depreciation paths registered so far this year.
