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Global currencies recover, US dollar and yen lag
By Philip Wee |
December 19, 2012, Wednesday
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Print Edition
Print Edition
WHAT does 2013 have in store for currencies? We expect the US dollar and Japanese yen to be weaker, the euro to be stable to firmer, and with the Chinese yuan, Asia ex-Japan and commodity currencies stronger. Together, they also set the stage for positive yen carry trades.
After a tumultuous year, focus is likely to return, on a G20 level, to nurturing the recovery.
With their new leaders in place to start their new terms next year, the world's two largest economies - China and the US - will resume cooperation to lead the G20 toward a more sustainable recovery by addressing global imbalances.
To this end, the US Federal Reserve has announced an "infinite" QE3 and a pledge to keep US rates low into mid-2015. With the fiscal consolidation process starting in 2013, the US policy mix is aimed at supporting businesses and consumers on the domestic demand front, and to push for more exports on the external front.
China's monetary policy has returned focus to inflation as its new leaders start work to shift the investment-led economy toward relying more on domestic demand. Interestingly, new leaders in Asia's two largest economies - China and Japan - will be pursuing policies that lead their exchange rates in opposite direction. While China works toward increasing the capital convertibility of the yuan, Japan is pushing for "unlimited" monetary easing and large public spending to weaken the yen.
With the yen no longer a role model for China, the International Monetary Fund has started promoting the Australian dollar and the Canadian dollar as examples of what international currencies should be like.
While world growth in 2013 is likely to be where it was this year, the difference will lie in a cyclical recovery in world trade. Hence, we should see the export-oriented Asian Newly Industrializing Economies - Hong Kong, Taiwan, South Korea and Singapore - doing better and narrowing their growth differential with their more resilient domestic demand-driven Southeast Asian counterparts.
For the weaker Asian exchange rates such as the Indian rupee and Indonesian rupiah, the cyclical recovery should also bring some relief and usher in more stability for their exchange rates.
Overall, 2013 is likely to be a friendlier year than 2012 for global currencies.
Philip Wee is a senior currency strategist with DBS Bank. The opinions are his own.
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