Weakened Asian Currencies on the Rebound

Olivier and Mann - Weakened Asian Currencies on the Rebound

by Olivier and Mann

The past week’s unexpected surging of inflation in the Asia-Pacific region could be temporary.

The New Zealand dollar rose to a three-month high on Tuesday following the increase in its central bank index of price-pressure projections, climbing to its highest level since 2015.

Inflation in South Korea, Thailand, Taiwan, and Indonesia also exceeded forecasts and in the Philippines prices rose but at a less than expected rate. The doubt is how much of the inflation was caused by the previous quarter’s foreign exchange rout where all leading Asian currencies weakened against the greenback. The rebounding of Asia’s currencies this year together with the oil industry flattening increases the possibility that inflation will slow. The fall back in the value of the US dollar should also reduce inflationary pressures as a stronger greenback fuels inflation by increasing the prices of imports and also increases the revenues of exporters, increasing the liquidity that can be spent domestically.

New Zealand is a good example, whereby inflation expectations have risen when the local currency weakens, leading to higher costs for imported goods and higher revenues for those exporting, especially the country’s dairy industry.

In general, the trend has never affected the markets, which for this year so far has been about global reflation and the comeback of bonds, bolstered by Donald Trump’s victorious presidential bid and the increasing political unpredictability coming from Washington towards Europe.

Investors the from majority of Asian markets don’t expect much reaction from their central banks, it may be true in part since all emerging Asian currencies, excluding the Philippine peso, have appreciated by at least 0.8% against the dollar this year with the won and both the Australian and New Zealand dollar increasing in value by more than 5%. This could lead to a turnaround in inflation in the next few months.