On Friday, Scotiabank – otherwise known as the Bank of Nova Scotia – outlined four factors that would drive Asian currencies higher in 2017.
Investors would “pour funds” into Asian markets on the following grounds:
1) If the Bank of Japan and European Central Bank continue with their stimulus programs, providing “accommodative” levels of liquidity to the economy.
With three consecutive months of positive core inflation in Japan, it is unlikely that the BoJ will be ending stimulus any time soon. Inflation is moving higher (which likely indicates to central bankers that stimulus is working), but at 0.2%, it remains barely above zero.
The ECB is a different kettle of fish, however, with some resistance to extremely loose monetary policy and balance sheet expansion offered by Germany – the mightiest economic force in the eurozone. The ECB are the final decision makers though and have so far resisted mounting pressure from Germany.
Many in the market do believe, however, that the ECB will begin tapering their bond buying program this year. In comments made on April-7 to German news group Zeit, ECB committee member Jens Weidmann said that the time to ease up on ECB stimulus was nearing, and that he’d be happy if that time were this year. At the ECB’s last meeting, on Thursday of last week, even the bank’s president, Mario Draghi, appeared enthusiastic about the current state of the eurozone economy.
2) If the Federal Reserve continues a gradual pace of rate hikes.
In Scotiabank’s view, the Fed will not risk tightening monetary policy too aggressively.
At Thursday’s upcoming FOMC decision, a slight US dollar rise and a slight fall in emerging market currencies is likely should the decision be what Scotia describe as a “hawkish hold.” The bank adds that any such move wouldn’t last beyond June, however, when the US dollar will begin falling due to seasonal factors and if other uncertainties dissipate.
3) If tension in the Korean peninsula eases.
The latest developments in this story include comments made on Thursday by Chinese Foreign Minister, Wang Yi, to a Russian diplomat, in which he expressed fears that the North Korean situation may slip out of control.
On Saturday, a US fleet, led by the USS Carl Vinson, began joint naval exercises with South Korea in the Sea of Japan. The exercises followed quickly after another unsuccessful missile launch by North Korea.
4) If global risk appetite increases.
This is, of course, a mix of the other three points in this list.
In particular, Scotiabank have their eye on the Indian rupee, Korean won and Taiwan dollar – all higher yielding Asian currencies likely to post the most gains under the aforementioned conditions.
And what about a fall?
Further to the opposites of each of the above four points – a withdrawal of stimulus, a more impatient Fed, elevated geopolitical risk and a reduction in risk appetite – in terms of possible developments that may prompt falls in Asian currencies, Scotiabank point to the potential for US import duties on goods from regional economies (US protectionism seemingly began this week when duties were imposed on imports from Canadian softwood lumber producers), as well as any further indications by the Fed that they will act to shrink their balance sheet.
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