Forex Movements Traced to ‘Overreaction’ by Fund Managers

This week’s overall weakening of Asian currencies vis-a-vis the dollar was an overreaction by fund managers to the prospects of higher US Federal Reserve rates this December, according to Finance Undersecretary Gil Beltran.

In its latest economic bulletin issued, the Department of Finance (DOF) said that “of 12 Asian countries, the Philippine peso has been one of the less volatile currencies, with standard deviation-mean ratio relative to the US$ of 5.0 percent from 2000 to November 24, 2016 compared with the Asian average of 7 percent.”

“The most volatile are the Chinese yuan (16.3 percent), and Indonesian rupiah (11.9 percent) and Malaysian ringgit (11.6 percent). This means that during this 16 year-period, the peso has been moving within 5.0 percent from its average value, ” Beltran, the D OF’s chief economist, said in the economic bulletin.

Beltran noted that from Nov . 1 to 24, 2016, the Philippine peso has moved in tandem with other Asian currencies, depreciating by 3.27 percent against the dollar as against the 12 Asian countries’ average depreciation of 3.26 percent.

“The Japanese yen depreciated most wildly, by 8.5 percent, compared with 6.73 percent for the Malaysian ringgit and 3.92 percent for the Indonesian rupiah,” Beltran said. Beltran said that several emerging economies with excess savings like the Philippines are not dependent on the regime of cheap financing resulting from the post-2008 financial crisis move by the Fed to cut rates as a monetary stimulus to ignite the United States’ economic recovery.

“Economies like the Philippines are net lenders rather than borrowers. There is, however, an overreaction by fund managers and have lumped all economies into one category without regards to macroeconomic fundamentals,” said Beltran.

With the impending normalization to be undertaken by the Federal Reserve, Beltran said “the days of cheap financing and large capital inflows are coming to an end.” He said that with the US economy recovering, the Fed would soon end its monetary stimulus program, which it resorted to in 2008 to aid the American economy at the height of the then-global financial crisis.

“Low interest rates were a boon to developing countries with lower borrowing costs and significant inflows of capital,” he noted.

Reports on Wednesday night’s release of the minutes of the Federal Open Market Committee (FOMC) meeting last Nov. 1-2 bared that US policymakers were inclined to raise interest rates very soon. On Thursday, Finance Secretary Carlos Dominguez III said the peso’s breaching of the P50 level against the dollar was an expected reaction of the local currency to the anticipated early rate increase by the Fed, with other Asian currencies also moving in the same direction.

“We are watching the currency movements very closely.We seem to be moving in the same direction as the other currencies. We just want to avoid abrupt changes in the exchange rates,” Dominguez said. But he added that the country’s rock solid macroeconomic fundamentals will enable the domestic economy to survive external shocks such as higher US interest rates and a stronger dollar.

Foreign economists said that countries like the Philippines and Thailand are expected to perform better as US interest rates rise and the dollar strengthens because they have significantly increased their foreign exchange reserves over the years, creating buffers to help them sail through the currency volatility and ensuing capital outflows.

The International Monetary Fund has forecast Thailand’s reserves at $163.3 billion by yearend, compared with the $64.9 billion needed, according to the IMF’s Assessing Reserve Adequacy (ADA) gauge, while the Philippines was projected to accumulate $84 billion against a $31 billion ADA requirement, said a Bloomberg report. The ADA is supposed to incorporate a country’s short-term debt with money supply, imports and investment flows. Tsutomu Soma, general manager of the fixed income department of SBI Securities Co. told Bloomberg that currencies most vulnerable to attack are those from countries with less reserves.

“You don’t attack the currency when you know the monetary authorities have plenty of money to intervene. Instead, you look for a currency that has less ability to defend it,” Soma said.

For instance, Malaysia, the worst performing of the major Asian currencies against the dollar, is projected to have $100 billion in reserves against a short-term external debt of $128.2 billion, based on IMF estimates. Outside Asia, other countries that IMF estimates show to be vulnerable to the impact of rising US interest rates include Turkey, South Africa, and Mexico.

Khoon Goh, head of Asia research at Australia & New Zealand Banking Group Ltd. in Singapore told Bloomberg that “both Thailand and the Philippines increased their reserves in the last couple of years and have adequate buffers to intervene to smooth currency volatility.” Beltran said the strengthening of the greenback against the peso “is expected as an impact of the Fed normalization.”

“The peso is just normalizing. It was P57 per the US dollar in 2004. All other currencies are moving in the same direction,” he said. With interest rates on American government bonds now rising, investors have began shifting their focus on the United States, which means that countries like the Philippines, Malaysia, Korea, Thailand and other Asian economies are seeing their currencies weakening against the dollar. The Hongkong and Shanghai Banking Corp. (HSBC) has lowered its forecast for the Thai baht to 35.70 to the dollar by year-end, down from an earlier forecast of 34.60.

In an earlier report, the Wall Street Journal said “the Japanese yen dropped to its weakest level in five months against the dollar even though Japan’s economy grew at a better-than-expected rate of 2.2 percent in the third quarter.” It reported that “the yen was last down 0.8 percent at 107.49, continuing its slide since the U.S. election outcome sparked a broad-based rise in the dollar against major currencies.”

“The Indonesian rupiah, Korean won and Indian rupee were among several emerging-market currencies to suffer against the U.S. dollar (last week), while China’s central bank set the yuan at a more than seven-year low versus the greenback in mainland markets,” the Wall Street Journal reported. According to the Financial Times, the Indonesian rupiah and Thai baht recorded a decline of 0.4 percent, while China’s renminbi weakened to more than Rmb6.9 per dollar, marking a more than 10 per cent drop since August last year.

The Japanese currency was a further 0.2 per cent weaker on Thursday at ¥112.69 per dollar. (DOF)