Photographer: Chris Ratcliffe / Bloomberg
Photographer: Chris Ratcliffe / Bloomberg
The dollar fell against emerging market currencies in Asia on the first trading day of 2021, a sign of growing risk appetite among investors as economic data improved and vaccines were introduced.
The yuan and Indonesian ringgit led the charge against the dollar, with the Chinese currency following a a slew of improving purchasing manager indices across the region bolstered sentiment. Assets from stocks to gold and cryptocurrencies also increased.
“Uncertainty is easing and the strong recovery in global growth should favor the rest of the world, so we think the USD has some overvaluation to get rid of,” said Patrik Schowitz, global multi-asset strategist at JPMorgan Asset Management, which is underweight in the dollar. The dollar’s weakness is probably most notable “against the emerging market currency complex, which should have a cyclical advantage and is still relatively cheap.”
Investors put aside concerns about growing viruses in Asia and bet China will lead the region in an economic recovery. From the yen to emerging market currencies such as Goldman Sachs Group Inc. and BlackRock Inc. sees further gains against the dollar, which could pose challenges for Asia policymakeris concerned about the impact on their exports.
Read: Weak dollar puts Asian economies to the test in hopes of higher exports
“The theme of dollar weakness is likely to extend this year and Asian currencies are very well placed to take advantage of it,” said Mitul Kotecha, senior emerging markets strategist at TD Securities in Singapore. “Exporters in Asia are the main beneficiaries of the malaise elsewhere, with exports of electronics and medical equipment increasing.”
After rising to one record high in March as the pandemic raged, the Bloomberg Dollar Spot Index fell, ending the year at a weaker 5.5%, the worst annual decline since 2017. Speculative positions against the currency were at their most in nearly a decade, according to data from the Commodity Futures Trading Commission for the second last week of December.
Emerging Rally
The effect of the decline in the US currency is especially noticeable with Asian currencies as 2021 kicked off.
The onshore yuan crossed the 6.5 level for the first time since June 2018, while the ringgit exceeded the 4 level against the dollar. The Indonesian rupiah jumped more than 1% to its highest level since February last year amid optimism for a faster economic recovery.
The Chinese yuan is likely to be a “striking” beneficiary of a weaker dollar thanks to “yield erosion and double deficits” weighing on the dollar, said Patrick Bennett, strategist at the Canadian Imperial Bank of Commerce in Hong Kong.
The yield advantage of the yuan against the dollar, which is almost the largest ever, is also driving capital inflows. According to a note from Goldman Sachs, based on an analysis of data from the International Monetary Fund, reserve managers are likely to have increased their positions in the yen and yuan in the third quarter of 2020.
“China’s growth remains strong as the US and Europe struggle to contain the virus, helping the yuan extend a rally in the new year,” said Ken Cheung, chief foreign exchange strategist at Mizuho Bank Ltd. the yuan to gain even further from here as China will lead the world in terms of economic recovery in the first half. The currency may test 6.3 in the coming months. “
Risk appetite is also cropping up in other asset classes, with a gauge of global equities heading for another high. Gold has climbed to the highest level in almost two months while the digital currency is Ether hit a record Monday.
– With the help of Lilian Karunungan