Asia | Asian economies: weak currencies and strong fundamentals

Asian currencies accelerated their depreciating trend recently. This report aims to understand this phenomenon and assess the associated risks.

Key points

• Key points:
• Asian currencies accelerated their depreciating trend recently, mainly due to the expectation of a protracted period of high US rates. The weakness of currency has already prompted the Central Bank of Indonesia to intervene in the FX market while other central banks are still weighing further steps.
• Behind their currency weakness is central banks’ measured tightening in the region. A number of factors are at play: (i) relatively tamed inflation; (ii) monetary easing in China and Japan; (iii) an export-oriented growth model. Compared to their peers, Asian economies appeared to be slower in following US rate hikes previously.
• The growth outlook in the region remains solid. Regional economies will benefit from the ongoing recovery of China as well as Japan. The pickup of the global electronic cycle is to boost the manufacturing sectors while the nearshoring trend leads to more investment in some winner economies.
• Overall, the negative impact of currency depreciation is limited in the region and unlikely to endanger financial stability given that most macro indicators are in good shape currently. Looking ahead, more Asian Central Banks are likely to intervene in the FX market in support of their currencies.

Authors

Geographies

Topics

Tags