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Despite our bullish dollar view for next year, the managed Chinese yuan should lend some stability to Asian emerging market currencies. Any depreciation in the yuan will likely require some easing in energy prices in China, while the likes of the Korean won and Taiwan dollar appear quite vulnerable to the rise in global inflation and tightening cycles
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The Asian FX pack is a heterogeneous one, and the outlook for 2022 requires consideration of a number of competing themes. At the heart of all this, is dollar strength. But China's yuan also acts as a local source of gravitational attraction, and China’s managed currency stability is lending some stability to other currencies in the region, dampening the dollar’s influence to some extent. That could change, but it will probably require commodity prices to moderate for China to soften its protective stance. The last thing China wants to do with growth already challenged, is to undermine consumer spending power by importing inflation through a weaker CNY.
Covid and the reopening of economies is also still a live topic in Asia, which despite a 'good' pandemic in 2020, suffered in 2021 due to a dismal vaccination rollout. This will be particularly relevant for the region’s main tourist hotspots and their associated currencies, but also to Australia, which has spent much of 2021 in lockdown.
And for the high beta currencies such as the region’s main “proxy-currency” the KRW, global inflation, central bank tightening, and in turn, risk sentiment and equity performance will provide an additional source of volatility (TWD, too, is exposed to such sentiment swings). This will need to be factored against rate increases locally, with a number of economies likely joining Korea in lift-off next year (Indonesia, India, and possibly the Philippines).
Additional risk factors that could exacerbate volatility include the ongoing restructuring of China’s property development sector, which faces some big bond maturities next year, not just coupon payments. Also, we are likely to see current accounts, which in many cases improved measurably during the pandemic, begin to deteriorate as domestic demand recovers. And after being given the benefit of the doubt in 2020 and 2021, 2022 may be a year of reckoning for the ratings agencies given bloated fiscal deficits and the persistence of some unorthodox monetary policies.
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Regional Head of Research, Asia-Pacific
Chief Economist, Greater China
Senior Economist, Philippines
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