Economics Markets Strategy - the DBS Vickers Securities Equities ...

Economics – Markets – Strategy
Currencies
2008 vs 2007 – what has changed?
In our last quarterly, we warned that emerging market jitters have a habit to
turning up in the second quarter, especially in years when economic and financial
uncertainties are high. We were not convinced that Asian currencies could continue
to ignore the weaknesses in their stock markets. With the exception of the Chinese
yuan, the Singapore dollar and the Taiwan dollar, most Asian currencies did
depreciate in 2Q08 (as at Jun 9).
Even as we were correct about Asian currencies returning some gains in 2Q08,
we no longer expect them to resume their appreciation in 2H08.
Over the course of the second quarter, it became evident that many of favorable
factors that drove Asian currencies higher in past two to three years have weakened.
Unlike the past couple of years, central banks in Asia are no longer intervening
this year to prevent an appreciation in their currencies, but to sell dollars to
defend their currencies.
Below are some of the changes in the currency landscape this year.
(1) Oil price shock & inflation
While Asian currencies proved their resilience to the US subprime/credit crisis,
they turned out to be vulnerable to the oil price shock. Crude oil prices based
on Nymex futures surged in 2Q08 to a record high of almost USD140/barrel on
Jun 6, after breaking decisively above USD100 in March.
Inflation requires strong policy responses to lower price pressures, which in
turn, will trim economic growth. Improvements in fiscal finances will be less
forthcoming as revenue collection slows with growth, while governments spend
to support growth. Trade balances were also pressured by costlier imports and
slower exports, leading current accounts in some countries to reverse from a
surplus into a deficit position. For several countries, inflation also sparked unrests
and increased political uncertainties. For some countries, this could lead to new
governments.
The change in this year’s landscape for Asia is best reflected by the sell-off in the
stock markets of its high-growth economies - China, India and Vietnam. As at
Jun 10, China has returned 60% of its 2005-2007 rally, with India losing the least
(41%) and Vietnam the most (85%).
(2) A significant shift on G7’s exchange rate stance
The desire for the USD to stabilize against major currencies was first expressed
at the G7 meeting in Washington on Apr 11. The communique warned about
Performance in 2Q08
CNY
SGD
1.3
0.8
Stock markets of Asia's high growth economies
Benchmark equity indices; Indexed: 1 Jan 05=100
500
China
TWD
HKD
-0.3
0.3
400
IDR
MYR
KRW
THB
INR
PHP
-6.4
-6.9
-5.2
-4.2
-2.0
-1.2
% ch vs USD
9 Jun 08 vs 31 Mar 08
-10 -5 0 5 10
300
200
India
Vietnam
100
0
Jan-05 Jan-06 Jan-07 Jan-08
25