Divergence in ASEAN currency’s strength versus the USD in 2021
Given there may be as many as 1,000 indiegeonus languages spoken across the Association of Southeast Asian Nations’ (ASEAN) 10 member states it is unsurprising the economic bloc’s working language is English.
Collectively Singapore, the Philippines, Brunei, Thailand, Malaysia, Vietnam, Myanmar, Laos, Cambodia and Indonesia constitute the eighth largest economy in the world, but their approaches to currency management are almost as diverse as their linguistic mix.
The Singapore dollar is pegged to a mixed basket of currency, the exact composition of which is a closely guarded secret by the country’s authorities. The Thai baht and Indonesian rupiah are theoretically free floating currencies but both countries have strict controls over moving large amounts of cash offshore.
While the Laotian kip, Vietnamese dong, Cambodian riel and Myanmar kyat are totally untradeable – the Laotian kip is so weak it is often not accepted domestically for large purchases with businesses often insisting on payment in US dollar or baht instead.
Given the untradeable nature of the last group of ASEAN currencies, analysis of regional FX performance tends to focus on the Indonesian rupiah, Malaysian ringgit, Philippines peso, Singapore dollar and Thai baht, the so-called ASEAN-5.
This group has underperformed the north Asian currencies – Chinese yuan, South Korean won, New Taiwan dollar – both on a year-to-date basis and since the start of the pandemic as a result of relatively weak economic performance and slow vaccination progress against a backdrop of broad US dollar strength.
“However, relative to their emerging market peers ASEAN currencies have been resilient since inflation has been contained so far and export performance has been strong,” notes Divya Devesh, head of ASA FX research at Standard Chartered.
Low vaccination rates have led to a start-stop reopening of economies, hampering the pace of recovery. While Covid infection rates have broadly stabilised in the fourth quarter after the Delta wave that swept the region in the second and third quarter, the arrival of the Omicron variant has created new uncertainty about the expected economic rebound next year.
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Tighter US monetary policy
The potential impact of tighter US monetary policy is also an issue.
“The fear of a repeat of 2013’s ‘taper tantrum’ in the US has also kept ASEAN currencies on the defensive since the Fed (Federal Reserve) first hinted about tapering in June,” says Peter Chia, senior FX strategist at UOB.
“The prospects of a faster tapering and earlier interest rate hikes by the Fed are likely to keep the pressure on ASEAN currencies over the coming year.”
This view is shared by Jeffrey Halley, Asia-Pacific senior market analyst at Oanda, who says that the Myanmar kyat has lost about a third of its value versus the US dollar this year as a result of the ruling junta’s actions. While Vietnam has agreed to refrain from any competitive devaluation of the dong following discussions with the office of the United States Trade Representative.
Indonesia’s currency has been supported by a, relatively, high base rate of 3.5% and a resurgence in commodity prices.
Indonesian rupiah performs in 2021
“IDR has been amongst the best performers in 2021, falling modestly versus the US dollar but rallying against the rest of the region,” he says.
“The rupiah’s high carry explains some of its strength and the rest can be accounted for by slow domestic demand limiting imports, and the sharp rally in base commodity prices for coal, nickel, oil and palm oil which has bolstered Indonesia's export accounts.”
As most ASEAN FX trades are made against the US dollar there are limited flows for intra-regional pairs. But this does not mean there aren’t interesting trends in terms of how these currencies are performing.
Major shifts in current account balances can dramatically affect performance. Having registered strong surpluses since 2014, Thailand is likely to post a deficit this year due to the travel restrictions imposed to stem the spread of Covid and large outflows from Thai corporates and retail investors.
Thai baht takes a battering
The result is that the THB has been the worst-performing ASEAN currency, losing more than 11% of its value. This compares to an average of 5% depreciation across the ASEAN-5 currencies according to Devesh.
The surge in energy prices and freight costs also did not help the THB although Joey Chew, senior Asia FX strategist at HSBC is optimistic that it will show modest recovery in 2022.
According to Mallika Sachdeva, a director with the Asia macro strategy team at Deutsche Bank, THB valuations now look cheap and the central bank also appears resistant to further weakness. But she cautions that a tourism recovery could still be slow to come by, especially while China keeps its borders sealed.
“[The] MYR has also underperformed in 2021 despite much higher energy prices, stronger exports and a large terms of trade improvement,” says Sachdeva. “Exporter preferences for retaining dollars and overseas portfolio investments by locals have held it back.”
Emerging market FX takes a hit
The Philippines peso has fallen, but not by as much as expected given that valuations are seen as very expensive and the trade deficit has widened sharply.
Indonesia is on track to post its first current account surplus in a decade, which has made the rupiah one of the region’s most resilient currencies, down only about 2% against the USD this year.
“Bumper trade surpluses, lighter foreign positioning in local debt markets and greater interest in Indonesian equity markets have provided insulation,” says Sachdeva. “Volatility has remained pretty low despite a sharp repricing in the Fed outlook.”
IDR’s resilience this year is even more notable when compared with other emerging market high-yielding currencies such as the Indian rupee, the South African rand, Brazilian real and Mexican peso.
“Higher prices of palm oil and coal obviously helped, but the non-commodity trade deficit has also narrowed significantly due to the government’s efforts to increase manufacturing capacity in industries such as stainless steel and electric vehicle production,” says Chew.
Strong equity inflows
In addition, equity inflows have been sufficient to offset foreign investors’ outflows from local currency bonds – an unusual phenomenon for Indonesia, which has traditionally relied on bond inflows to fund its current account deficit.
Despite the disparities outlined above, Mingze Wu, FX trader at StoneX’s global payments division says price levels between ASEAN currencies are within past years’ trading range.
“The Singapore dollar strengthened more than most, which is understandable given its safe haven status and stability, but IDR has managed to strengthen significantly against even SGD since April 2021,” he adds. “That said, IDR is still weaker compared to USD this year, which affirms what we have always known – when the US sneezes, the rest of the world gets a cold.”
The dong may be very lightly traded and coming from a low base, but it still merits the accolade of best performing ASEAN currency in 2021 according to Seong Kiyong, lead Asia macro strategist at Société Générale CIB.
No yuan pivot - yet
“VND’s performance is attributable to strong goods demand and subsequent robust export performance,” Seong explains. “The agreement between the US Treasury Department and the State Bank of Vietnam on exchange rates was another catalyst for VND appreciation.”
Seong suggests the widely held analyst view that China’s yuan is pivoting other Asian currencies is only partially correct, referencing FX performance divergence in the north Asian bloc to support his observation.
Global real money investors are active in the Indonesian and Philippines bond markets and “fast money” investors such as hedge funds are also active in Thailand and the Philippines. However, Seong refers to negligible investor activity in Cambodia, Laos, Myanmar and Vietnam.
Given that many ASEAN countries control their currencies tightly (or as Halley puts it “run dirty pegs to the US dollar”) it should come as little surprise to learn that FX trading is dominated by institutional investors, central banks and corporates.
“There is almost no access for retail traders to trade these currencies and honestly, given the much lower volatility and liquidity compared to majors such as AUD and JPY there are more exciting currencies to play with,” says Wu.