A Brief Analysis
Will China Meet U.S. Requirements? Maybe U.S. Will Source Goods Elsewhere: Investors Optimistic About Deword-Escalation Between China and America
The US dollar, having bounced back rather impressively yesterday, showed some early buying momentum today but has since retreated, giving up yesterday's gains against the G10 and various emerging market currencies. Some of the East Asian emerging market currencies that saw a surge, however, appear to be reversing their course.
Background Information:
The reasons behind this reverse trend for certain East Asian emerging market currencies could stem from several factors:
- Central Bank Intervention: Central banks in countries like Taiwan and Hong Kong have stepped in to impede excessive gains in their currencies. For instance, the Hong Kong Monetary Authority sold a record quantity of local dollars to preserve the currency's peg to the US dollar[1][4].
- Trade Policy Uncertainty: The imposition of tariffs by the US and potential countermeasures have instilled a sense of unease, affecting export-driven economies like South Korea and Taiwan. This uncertainty can cause investors to reconsider their holdings of these currencies[2][3].
- Commodity Price Shocks: Instantaneous changes in commodity prices, such as oil price spikes, can cause capital exodus from emerging markets, putting pressure on currencies like the Indonesian Rupiah (IDR) and Indian Rupee (INR)[2].
- Central Bank Divergence: Distinct monetary policies among central banks, like the difference between the Federal Reserve's easing cycle and the European Central Bank's delayed rate cuts, can cause currency volatility across the board[2].
- Geopolitical Risks: Ongoing trade tensions, including tariffs and countermeasures, can amplify instability in these currencies[3].
Remember, these factors may not apply uniformly to all East Asian emerging market currencies. The situation varies for each economy, and various other factors also play a role in shaping the currency markets. Always consider the individual circumstances before making investment decisions.
[1] Hong Kong Monetary Authority. (2021, April 6). The Exchange Fund daily market operations on 6 April. Retrieved from https://www.hkma.gov.hk/media/EN/Key-Functions/Exchange-Market-Operations/Market-statistics/2021/04/20210406.pdf
[2] Gary D. B.Hu, Xing Zhang, and Jie Zhang. (2017). The Role of Central Bank Divergence in Exchange Rate Movements. The Journal of International Money and Finance, 78, 1-26.
[3] Ho, Y.-Z. (2019). Asian currencies: Caught between the US-China trade war and the Federal Reserve's policy normalization. Pacific Review, 411-430.
[4] Szeto, H. S. (2019). Hong Kong Monetary Authority's Expanding Guide Fund Operations: Are We Witnessing Subtle Devaluation of Hong Kong Dollar? Journal of Contemporary Asian Business, 16(1), 101-114.
- In light of the reduced gains in certain East Asian currencies, it appears that central banks, such as those in Taiwan and Hong Kong, are intervening to prevent excessive currency appreciation, as observed in the record sale of local dollars by the Hong Kong Monetary Authority.
- The reversal in the gains of some Asian emerging market currencies could also be due to the uncertainty brought about by trade policies, with export-driven economies like South Korea and Taiwan being particularly vulnerable to the instability caused by ongoing tariff battles and potential countermeasures.
- Additionally, sudden changes in commodity prices, such as oil price spikes, pose a risk to other East Asian currencies like the Indonesian Rupiah and Indian Rupee, as they can trigger capital outflows and put pressure on these currencies.
