SINGAPORE (BLOOMBERG) - All 10 major Asian currencies are forecast by strategists to fall against the US dollar for a third year. They blame China.
The Singapore dollar, Indonesia's rupiah, South Korea's won and all the seven other major Asian currencies are projected to decline the most in 2016, with India's rupee seen depreciating the least.
While the US Federal Reserve on Wednesday (Dec 16) 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.
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. Goldman Sachs and JPMorgan Chase & Co say Chinese renminbi weakness will infect exchange rates in the region and across emerging markets.
"The Chinese yuan trumps the US dollar so far in terms of its impact on Asian currencies," said Mr Claudio Piron, co-head of Asian currency and rates strategy at Bank of America Merrill Lynch in Singapore. "Asia has a heightened sensitivity to the yuan, which represents the hub of the region's supply chain to the rest of the world."
The yuan weakened 2.2 per cent this month in Hong Kong's offshore market, the most in Asia after the won, and 1.3 per cent in Shanghai after the People's Bank of China allowed its decline versus the dollar to accelerate. Restrictions on trading are being lifted as the International Monetary Fund adds the currency to its reserve basket.
The PBOC has cut the yuan's reference rate by 1.3 per cent in December. That's the most since August, when policymakers lowered the fixing by 4.4 per cent in three days. Friday's level of 6.4814 versus the US dollar was the weakest since June 2011. 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.
Indexes compiled by the Bank for International Settlements show the yuan is still the strongest among 24 emerging-market currencies in trade-weighted terms after adjusting for inflation, hurting China's export competitiveness.
"China is actually gaining some competitiveness on a trade-weighted basis" with the help from the weaker fixing, said Mr Craig Chan, the Singapore-based head of foreign-exchange strategy for Asia ex-Japan at Nomura Holdings. With this week's policy tightening by the Fed already priced in, going forward, Asian currencies will be more sensitive to moves in the yuan, he said.
Citigroup, Nomura Citigroup, 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. Bank of America and Nomura also advise selling the offshore yuan, which trades freely unlike the onshore currency.
Asia's largest economy accounts for 34.3 per cent of South Korea's total trade, according to the Japanese brokerage, followed by the Philippines at 25 per cent and Thailand, Malaysia and Taiwan at about 22 per cent each. Some 19 per cent of Indonesia's trade is with China, and a slump in global commodity prices also weighs on the South-east Asian nation's currency. Exports contracted for nine months this year in China, 11 months in South Korea and 10 months in Taiwan.
Though the yuan will weaken next year, a sharp depreciation by Chinese authorities is unlikely, according to the world's largest money manager.
"They've already learned that it will trigger devaluations elsewhere," said Mr Joel Kim, the Singapore-based head of Asia-Pacific fixed income at BlackRock, which oversees US$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 favour macro-stability and the currency is part of it."
The IMF predicts growth in Asia's developing economies will slow to 6.4 per cent next year from 6.5 per cent in 2015, with China's expansion decelerating to 6.3 per cent from 6.8 per cent. That means Asian central banks will need to further cut interest rates while the Fed gradually tightens, resulting in outflows and weaker currencies.
Seven of 23 economists in a Bloomberg survey expect the Bank of Korea to lower its main rate by at least 25 basis points next year from a record low of 1.5 per cent. Further easing is also forecast in Indonesia, Thailand and India.
"This impending Fed tightening cycle is without a strong synchronised 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. This time we have the reverse."