How Can China’s Currency Decouple From The US Dollar Without Starting A …

23 Dec 2015 | Author: | No comments yet »

As Fed fog lifts, central bankers keep puzzling over China.

South Korea’s won headed for a third weekly drop after the Federal Reserve raised interest rates and as the falling yuan damped the nation’s export outlook.

SAN FRANCISCO: The world’s central banks are scrambling to assess the risk a slowing China poses to their economies and appear to be no closer than most other observers to working out what is going on in the world’s second largest economy. The Bloomberg Dollar Spot Index, which tracks the greenback against 10 peers, jumped the most in six weeks on Thursday after the Fed increased benchmark borrowing costs for the first time in almost a decade. While the Reserve Bank of Australia and the Bank of Japan have offices in Beijing, the US Federal Reserve and the European Central Bank appear to rely on the same data – that may be flawed – as everyone else. By raising interest rates on Wednesday the Fed removed one major source of uncertainty, leaving developments in China at the top of investors’ and policymakers’ watch lists, alongside the Fed’s next steps.

Federal Reserve on Wednesday indicated four interest-rate increases next year, Taiwan cut on Thursday and economists are forecasting reductions in China, South Korea, Thailand, India and Indonesia to spur growth. A quarter of South Korean exports are shipped to China, according to Australia & New Zealand Banking Group Ltd. “For Asian currencies and the won in particular the continued decline in the yuan is having an impact,” said Khoon Goh, a senior strategist at ANZ in Singapore. “That’s putting pressure on Asian currencies particularly those with close export ties to China.” The won dropped 0.4 percent this week and on Friday to 1,184.65 a dollar as of 10:53 a.m. in Seoul, data compiled by Bloomberg show. Though Fed Chair Janet Yellen said further US monetary tightening would be gradual and data-dependent, some market watchers sensed a hawkish tone in the unanimous support Fed officials gave Yellen for the hike, and the fact that their median projected target rate for 2016 remained at 1.375 percent.

China’s slowdown is hurting Asian nations with strong trade linkages to the world’s second-biggest economy, and the Aug. 11 devaluation of the yuan clouded the outlook for a currency that had been source of stability in Asia during past crises. With investors feeling comfortable taking on risk, low-yielding funding currencies such as the single currency would be unlikely to see much demand, analysts said. Commerzbank currency strategist Thulan Nguyen, in Frankfurt, said the main reason the dollar had gained was that many investors had expected a more dovish Fed statement, but that the dollar’s post-Fed rally was already beginning to fade. “I would be cautious in interpreting too much into (the hawkish tilt to the statement), particularly as for exchange rates what was relevant was that apart from lower oil prices, the appreciation of the US dollar was dampening inflation at the moment,” she said. “That implies that they do not expect a sharp appreciation of the dollar. If Beijing allows the yuan to weaken further and re-pegs it to a basket of currencies instead of just the dollar, it could end up exporting deflation that might delay or reverse rate hikes globally. “We try to get the best information we have… and we talk to everybody. Economists have questioned China’s economic statistics for years and turned to measures such as concrete, steel or electricity production to get a handle on an economy that has grown almost 10 percent a year for 30 years.

The yen hit a one-week trough of 122.645 yen per dollar overnight as Japan’s Nikkei surged, before bouncing back to 122.33 yen, down just 0.1 percent on the day. A measure of swings in the currency reached the highest since August on Dec. 14, after an arm of the central bank unveiled a new yuan index comprising 13 currencies, a development seen as setting the stage for a further depreciation. The issue, according to Fed insiders, former Fed employees and economists is that while the Group of Seven top industrial nations share a common policy language and well established communications channels, they are less developed at the Group of 20. Neither does the People’s Bank of China send policymakers to international economic meetings where they could mingle with top officials from the Fed, ECB, BOJ and other central banks. “Almost uniformly, from central banks and international organizations, what I hear is that the Chinese side is reluctant to engage,” said Michael Spencer, Deutsche Bank’s Asia-focused economist.

That caused a full-fledged crisis as foreign debts became harder to pay and tighter monetary policy was needed to stabilize currencies and rein in inflation. Citigroup Inc., the world’s biggest foreign-exchange trader, Bank of America and Nomura recommend selling the won and Taiwan dollar against the greenback given their close economic ties with China. The Fed, for its part, is now churning out at least one paper on China each month, compared with only three or four a year a decade ago, a Reuters analysis shows. Asia’s largest economy accounts for 34.3 percent of South Korea’s total trade, according to the Japanese brokerage, followed by the Philippines at 25 percent and Thailand, Malaysia and Taiwan at about 22 percent each.

Exports contracted for nine months this year in China, 11 months in South Korea and 10 months in Taiwan. “They’ve already learned that it will trigger devaluations elsewhere,” said Joel Kim, the Singapore-based head of Asia-Pacific fixed income at BlackRock Inc., which oversees $4.5 trillion. “The fact that exports have come down is a global demand problem rather than a competitiveness issue in China itself. China is likely going to favor macro-stability and the currency is part of it.” The IMF predicts growth in Asia’s developing economies will slow to 6.4 percent next year from 6.5 percent in 2015, with China’s expansion decelerating to 6.3 percent from 6.8 percent. Further easing is also forecast in Indonesia, Thailand and India. “This impending Fed tightening cycle is without a strong synchronized global recovery and export rebound,” said Bank of America’s Piron. “Typically this would be bullish for Asian currencies as they would appreciate as their current-account surpluses expand on improving exports.

San Francisco Fed President John Williams, who makes an annual swing through Asia with Board Governor Jerome Powell, has said his meetings with Chinese officials give him greater confidence the authorities there will engineer a smooth transition from an export-led economy to a domestically driven one, even if that pivot is faster than expected. Senior staff at major central banks in Europe say they have built up competence on China in recent years, but that gaps in data, plus the sheer pace of change make it a challenge. Lower commodity prices and a slowing Chinese economy are already causing stress, and a return to a more normal credit spread would especially hurt the most vulnerable companies. Floating exchange rates may be safer than the informally pegged rates of pre-1997 Asia, but they are far more dangerous than the fixed rates that prevailed before 1971.

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