Reserves Make Winners of Chinese Yuan, Taiwan Dollar: Currencies

By Lilian Karunungan Photographer: Brent Lewin/Bloomberg

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The secret to figuring out which Asian currencies will avoid a rout as the U.S. moves closer to raising interest rates lies in how well countries have saved for a rainy day, the region’s most-accurate forecaster says.
While all emerging-Asia exchange rates will weaken through mid-2015, China’s yuan and Taiwan’s dollar will post the smallest declines of about 1 percent each, according to ABN Amro Bank NV. The Dutch bank says the currencies will find support because China has the world’s biggest foreign reserves at $3.99 trillion, and Taiwan’s $421 billion are the fifth-largest.
“The yuan is the most resilient to all external factors, while Asian currencies are vulnerable,” Roy Teo, a strategist in Singapore at ABN Amro, which topped Bloomberg’s rankings of the region’s strategists for the four quarters ended Sept. 30, said in an Oct. 8 phone interview. “China has large foreign-exchange reserves. Taiwan also has huge reserves.”
Those holdings of foreign cash should reassure investors who might otherwise pull their money and reinvest in the U.S. to take advantage of rising bond yields. The Bloomberg-JPMorgan Asia Dollar Index (ADXY), which tracks the
region’s 10 biggest exchange rates, fell last month by the most in two years as money started to flee developing economies.

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ABN Amro, which didn’t feature in the overall Asia rankings in the first and second quarters of this year, sees the yuan sliding to 6.2 per dollar by mid-2015, from 6.1309 at the end of last week. Taiwan’s dollar will slip 0.9 percent to NT$30.7 per U.S. dollar, from NT$30.43, the bank predicts.
National Australia Bank Ltd. and Oversea-Chinese Banking Corp., ranked second and third, say the yuan will be the only Asian currency to strengthen by mid-2015. NAB sees it climbing to 6.1 per dollar, while OCBC predicts 6.0952.
The yuan rose 0.07 percent to 6.1267 per dollar as of 2:19 p.m. in Shanghai, while the Taiwan dollar advanced 0.06 percent to NT$30.412, separate prices from China Foreign Exchange Trade System and Taipei Forex Inc. show.
The best forecasters in Bloomberg’s rankings were identified by averaging individual scores on margin of error, timing and directional accuracy across 11 currency pairs during the past four quarters. Banks had to be ranked in at least seven of the 11 pairs to qualify for the overall placing, with 28 making the grade.
ABN Amro’s score of 60.32 beat NAB’s 59 and the 58.08 registered by OCBC, Southeast Asia’s second-largest lender. Scotiabank and HSBC Holdings Plc filled out the top five.

‘Different Dynamic’

“The rest of Asia may be swept up by the potential dollar tide as the Fed turns the corner on monetary policy,” Emmanuel Ng, a currency strategist in Singapore at OCBC, said by e-mail on Oct. 9. “The yuan will likely continue to trade on a different dynamic.”
In the U.S., there’s a 56 percent chance the Federal Reserve will raise its near-zero main interest rate to at least 0.5 percent by September 2015, futures prices show.
Prospects of higher borrowing costs helped push the Bloomberg-JPMorgan currencies gauge down 1.4 percent in September, leaving it 0.8 percent lower this year. The MSCI Emerging Markets Index of stocks snapped seven months of gains to drop 7.6 percent in September, the most since May 2012.
The yuan is already the only one of 24 emerging-market currencies to strengthen versus the dollar in the past three months, climbing 1.3 percent. It touched a 1 1/2-year low of 6.2676 in April after the People’s Bank of China oversaw the currency’s sharpest devaluation since a peg ended in 2005 to deter speculators from betting on appreciation.

China Stimulus

China has run current-account surpluses every year since 1993 and its foreign reserves, excluding gold, have doubled since the depths of the global financial crisis in 2008. The yuan has also been buoyed by government measures to stimulate the economy, which include pumping 500 billion yuan ($82 billion) into the nation’s banks last month.
Signs of slowing growth in the world’s second-largest economy prompted Amundi Asset Management to reduce its exposure to the yuan, Raymond Lim, the money manager’s head of Asian bonds, said at an Oct. 9 briefing in Singapore.
China’s industrial output growth was the slowest since 2008 in August, while foreign investment slumped. Gross domestic product will expand 7.3 percent this year, the least since 1990, according to a Bloomberg survey. Speculation a banking crisis is brewing has also hurt the outlook for China’s economy.

Worst Performers

The impact on Taiwan’s dollar will be tempered by an accelerating economy, ABN Amro predicts. Both the state-owned Dutch lender and NAB expect India’s rupee and South Korea’s won to be Asia’s worst performers through the middle of next year because of weakness in the economies that may encourage policy makers to boost the money supply.
Also working in the yuan’s favor is China’s ambition to promote the currency for use in global trade, which will encourage the authorities to limit its volatility, NAB predicts.
“There’s increasing integration with regard to the use of the yuan” in global trade, Christy Tan, NAB’s Hong Kong-based head of markets strategy and research, said by phone Oct. 8. “The authorities will ensure yuan stability.”