Best of the Week
Most Popular
1. Gold Final Warning: Here Are the Stunning Implications of Plunging Gold Price - P_Radomski_CFA
2.Fed Balance Sheet QE4EVER - Stock Market Trend Forecast Analysis - Nadeem_Walayat
3.UK House Prices, Immigration, and Population Growth Mega Trend Forecast - Part1 - Nadeem_Walayat
4.Gold and Silver Precious Metals Pot Pourri - Rambus_Chartology
5.The Exponential Stocks Bull Market - Nadeem_Walayat
6.Yield Curve Inversion and the Stock Market 2019 - Nadeem_Walayat
7.America's 30 Blocks of Holes - James_Quinn
8.US Presidential Cycle and Stock Market Trend 2019 - Nadeem_Walayat
9.Dear Stocks Bull Market: Happy 10 Year Anniversary! - Troy_Bombardia
10.Britain's Demographic Time Bomb Has Gone Off! - Nadeem_Walayat
Last 7 days
Stock Market Crash Edition - 26th Mar 19
Handy Ways to Boost Your Home Income - 26th Mar 19
US Treasury Bond Yield Inversion and Political Fed Cycles - 26th Mar 19
Golan Heights Oil all about the Shekels - 26th Mar 19
Falling Yields a Catalyst for The Gold Catalyst - 26th Mar 19
Can We Lock Up Rachel Maddow Now? - 25th Mar 19
Real US National Debt Might Be $230 Trillion - 25th Mar 19
Friday's Stock Market Sell-Off - New Downtrend or Just Correction? - 25th Mar 19
20 Days Left to Find Buying Opportunities In Gold - 25th Mar 19
Will the Historic Imbalance in Gold Stocks to Gold Price Resolve ? - 25th Mar 19
EasySMX Wireless Games Controllers Review - 25th Mar 19
Stock Market Short-term Top - 25th Mar 19
UK Population Growth - Latest ONS Immigration Statistics and Consequences - 24th Mar 19
The Fed Follows Trump's Tweets, And Does The Right Thing - 24th Mar 19
Yield Curves, 2yr Yield, SPX Stocks and a Crack Up Boom? - 24th Mar 19
Risk/Reward in Silver Favors Buying Now, Not Waiting for Big Moves - 23rd Mar 19
Similarities Between Stock Market Today and Previous Bull Market Tops - 23rd Mar 19
Stock Market DOW Seasonal Trend Analysis - 23rd Mar 19
US Dollar Breakdown on Fed Was Much Worse Than It Looks - 23rd Mar 19
Gold Mid-Tier GDXJ Stocks Fundamentals - 23rd Mar 19
Which Currency Pairs Stand to Benefit from Prevailing Risk Aversion? - 23rd Mar 19
If You Get These 3 Things Right, You’ll Never Have to Worry About Money - 22nd Mar 19
March 2019 Cryptocurrency Technical Analysis - 22nd Mar 19
Turkey Tourist Fakes Market Bargains Haggling Top Tips - 22nd Mar 19
Next Recession: Finding A 48% Yield Amid The Ruins - 22nd Mar 19
Your Future Stock Returns Might Unpleasantly Surprise You - 22nd Mar 19
Fed Acknowledges “Recession Risks”. Run for the Hills! - 22nd Mar 19
Will Bridging Loans Grow in Demand and Usage in 2019? - 22nd Mar 19
Does Fed Know Something Gold Investors Do Not Know? - 21st Mar 19
Gold …Some Confirmations to Watch For - 21st Mar 19
UKIP No Longer About BrExit, Becomes BNP 2.0, Muslim Hate Party - 21st Mar 19
A Message to the Gold Bulls: Relying on the CoT Gives You A False Sense of Security - 20th Mar 19
The Secret to Funding a Green New Deal - 20th Mar 19
Vietnam, Part I: Colonialism and National Liberation - 20th Mar 19
Will the Fed Cut its Interest Rate Forecast, Pushing Gold Higher? - 20th Mar 19
Dow Jones Stock Market Topping Pattern - 20th Mar 19
Gold Stocks Outperform Gold but Not Stocks - 20th Mar 19
Here’s What You’re Not Hearing About the US - China Trade War - 20th Mar 19
US Overdosing on Debt - 19th Mar 19
Looking at the Economic Winter Season Ahead - 19th Mar 19
Will the Stock Market Crash Like 1937? - 19th Mar 19
Stock Market VIX Volaility Analysis - 19th Mar 19
FREE Access to Stock and Finanacial Markets Trading Analysis Worth $1229! - 19th Mar 19
US Stock Markets Price Anomaly Setup Continues - 19th Mar 19

Market Oracle FREE Newsletter

Stock Market Trend Forecast March to September 2019

How Trade Wars Penalize Asian Currencies

Currencies / Protectionism Jul 09, 2018 - 06:41 AM GMT

By: Dan_Steinbock

Currencies Not so long ago, Asian currencies anticipated depreciation pressures to increase, due to monetary normalization. Yet, it is the trade wars that are now penalizing all currencies, particularly in exporting economies.

In January, I gave a global economic briefing on the outlook of the Philippines in the Nordic Chamber of Commerce in Manila. At the time, the peso was still about 50.80 to U.S. dollar. Among other things, I projected the peso to soften to 54 or more toward the end of the year, which I considered largely the net effect of normalization in advanced economies, elevated trade friction worldwide, as well as fiscal expansion (the Duterte investment program).


While skeptics thought the projection was too “pessimistic,” the peso is today around 53.40 to U.S. dollar and has occasionally almost exceeded 54.00.

In this view, depreciation pressures are typical to many currencies in emerging Asia, most of which are likely to continue to soften in 2019, including the peso.

The onset of trade wars

Through his 2016 campaign, Donald Trump pledged tougher trade policies. When he arrived in the White House in January 2017, he buried the Transpacific Partnership (TPP), initiated talks about the future of the North American Free Trade Agreement (NAFTA), suspended the US-EU free trade talks (TTIP) and intensified attacks against Chinese trade and investment.

In the global markets, these moves translated to occasional fluctuations, while increasing uncertainty about the global economic outlook.

Initially, the US-Chinese Summit in April 2017 seemed to offer some trade relief. Nevertheless, things changed quickly as Trump directed his administration to take a closer look first at Chinese steel and aluminum and later at intellectual property rights and the technology sector – particularly vis-à-vis national security.

With the most hawkish administration since the Reagan rearmament era, these directives resulted in the kind of reports that were only to be expected in early 2018, when the Trump administration began a steady escalation of the US-Chinese trade war, starting in March. Last week, the White House made the “largest trade war in history” official, while starting to escalate trade friction with Europe. 

Unsurprisingly, almost all Asian currencies are now taking hits not just from expected directions (rate hikes by the U.S. Federal Reserve, the anticipated end of the European Central Bank’s quantitative easing), but also from more less-expected directions (U.S.-Chinese trade war, the nascent U.S.-EU trade war, and escalating rhetoric among the NAFTA partners; U.S., Canada and Mexico).

Impact on Asian currencies

In Asia, the net effect has been as projected half a year ago. Among high-income economies, export-led currencies – Korean won (KRW, -5.1%), Taiwanese dollar (TWD, -2.7%) and Singaporean dollar (SGD, -2.3%) – have weakened relatively most against the U.S. dollar.

The same goes for the currencies of upper-middle income economies, including Chinese yuan (CNY, -1.5%) and Thai baht (, THB, -1.4%), respectively.

Among lower-middle income economies, it is those currencies that represent the relatively fastest-growing countries – Indian rupee (INR, -7.5%), Philippines peso (PHP, -7.4%) and Indonesian rupiah (IDR, -5.0%) – that have weakened relatively most against the U.S. dollar. Since these currencies also represent twin-deficit economies, they will remain relatively vulnerable in adverse scenarios (Figure).

Figure                    Asian Currencies: 2018 Year-To-Date Percent Change

Nevertheless, these twin deficits should not be compared with that of, say, the U.S. Unlike advanced economies that take more debt to sustain unsustainable living standards, rapidly-growing emerging economies seek to exploit twin deficits in the medium term to accelerate economic growth in the long term. Yet, twin deficits come with exposure that should keep government leaders alert.

In the early phases of the trade wars, those countries – Taiwan, Singapore, Indonesia, Korea, and Malaysia - that export relatively more to China than to the U.S. tend to be better positioned. The reverse case implies greater relative vulnerabilities, which is why Vietnam has resumed the depreciation of its dong.

Other Asian countries try to avoid U.S. trade wrath by fostering strategic ties with the White House (Taiwan, Korea). Still others seek to hedge their bets by seeking greater balance between Chinese economic cooperation and U.S. security ties (Philippines, Malaysia).

The worse is still ahead

It is a highly dynamic landscape. Among the high-income countries, the Trump administration has offered Seoul strategic relief from the trade war, thanks to Seoul’s cooperation in the Koreas’ nuclear talks, which will provide some cushion against won’s further weakening, in the short-term.

Among the upper-middle income countries, the Chinese central bank (PBOC) pledged last week it would keep the exchange rate stable, which put something of a damper on dollar increases. Since China accounts for more than a fifth of the Federal Reserve’s trade-weighted dollar index, more than any other country, it can subdue dollar rallies.

Among the lower-middle income economies, those countries that have strong domestic demand (India, Philippines) are relatively more insulated from trade wars than commodity producers (Indonesia) and exporters (Vietnam). In the long run, there is no safe haven from the trade wars, however.

Here are some unsettling scenarios for the coming months: If the trade war between the U.S. and China will continue to worsen, it could penalize both U.S. and Chinese GDP by 0.25% by the year end.

If similar trade war expands between the U.S. and Europe, the implications will be worse to the U.S. but weaken Germany, France and other EU core economies and thus undermine the fragile European recovery.

If comparable trade friction will extend to Japan, which, despite huge monetary injections by the Bank of Japan (BOJ), has already lost two decades amid secular stagnation, the adverse impact could harm global economic prospects.

If the NAFTA talks were to collapse, U.S. economy would take still another hit, but so would both Canada and Mexico, which could compel them to broaden their ties with Asian economies.

In brief, the elements of a perfect storm are now possible, if not probable yet, especially if the adverse trends will converge. Even in an incremental scenario – one that would mean continued but not disruptive deterioration – economic damage would prove far more substantial in 2019, or worse.

How the major economies will respond to trade war escalation in the coming weeks will determine what’s ahead for all of us in the next few years.

Dr Steinbock is the founder of the Difference Group and has served as the research director at the India, China, and America Institute (USA) and a visiting fellow at the Shanghai Institutes for International Studies (China) and the EU Center (Singapore). For more information, see http://www.differencegroup.net/

© 2018 Copyright Dan Steinbock - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules