(From BARRON'S)
By Robert Flint
Asia-Pacific currencies are likely to gain further against the U.S. dollar in 2008, with even the smaller regional counterparts to the greenback holding promise for investors.
Proximity to China and India is the common denominator. The Indonesian rupiah, the Thai baht and the Malaysian ringgit stand good chances of maintaining recent gains, bolstered by strong demand for exports. Widely traded currencies, such as the Japanese yen or Australian and New Zealand dollars, will also advance, thanks to the China-India influence, among other advantages.
"Asia in general will outperform Western economies, and the yen will appreciate on the back of it," says Robert Fullem, head of corporate foreign exchange sales at Bank of Tokyo Mitsubishi in New York.
The greenback had a miserable 2007, declining against 14 of the 16 most actively traded currencies. The subprime crisis, the Federal Reserve's need to stay accommodative on interest rates, plus longstanding concerns about America's ability to finance its massive trade and current-account deficits all hurt the currency. More of the same is expected in 2008.
China and India are still recording close to double-digit increases in gross domestic product. That provides big support for the economies -- and currencies -- of their neighboring trading partners. Some countries simply supply raw materials, while others, such as Japan, South Korea and Taiwan, profit considerably through projects to expand infrastructure and improve technology.
"China and India will act as a critical mass for the regional economies," says Marc Chandler, head of global foreign exchange at Brown Brothers Harriman in New York. "Countries in their orbit will benefit."
With the dollar now around 110 yen, the Japanese currency is close to its fair value, measured by purchasing power parity, says Fullem. Bank of Tokyo-Mitsubishi anticipates the dollar will shrink to 105 yen by the end of December.
The Australian and New Zealand dollars have been among the bigger beneficiaries of the yen-carry trade; that shouldn't stop this year. Australia's benchmark rate is 6.75% and New Zealand's is 8.25%. While analysts debate the size of the Fed's next rate reduction, speculation in Australia centers on rate hikes. Moreover, the Australian dollar wins on demand for its commodities, such as gold, iron and copper, as well as foodstuffs like wheat and meat.
The outlook for smaller A-Pac currencies is positive, though gains won't match recent years'. The Thai baht rose about 15% against the dollar in 2006, causing the country's central bank to impose capital controls. The controls have been relaxed, and today the baht is stronger than it was at the end of 2006. But Thai authorities, like their counterparts elsewhere in Asia, want to protect their exports by keeping their currencies in line with regional rivals'.
The yuan presents a special case. It will continue to strengthen steadily, closely guided by government control. Non-deliverable forwards, the primary means for investors to gain exposure to the yuan, indicate an 8.5% appreciation for the Chinese currency in 12 months.
"There's no doubt about [the yuan's] direction," says Chandler.
For Barron's subscription information call 1-888-BARRONS ext. 685 or inquire online at http://www.barronsmag.com/subscription/subscription.html.
By Robert Flint
Asia-Pacific currencies are likely to gain further against the U.S. dollar in 2008, with even the smaller regional counterparts to the greenback holding promise for investors.
Proximity to China and India is the common denominator. The Indonesian rupiah, the Thai baht and the Malaysian ringgit stand good chances of maintaining recent gains, bolstered by strong demand for exports. Widely traded currencies, such as the Japanese yen or Australian and New Zealand dollars, will also advance, thanks to the China-India influence, among other advantages.
"Asia in general will outperform Western economies, and the yen will appreciate on the back of it," says Robert Fullem, head of corporate foreign exchange sales at Bank of Tokyo Mitsubishi in New York.
The greenback had a miserable 2007, declining against 14 of the 16 most actively traded currencies. The subprime crisis, the Federal Reserve's need to stay accommodative on interest rates, plus longstanding concerns about America's ability to finance its massive trade and current-account deficits all hurt the currency. More of the same is expected in 2008.
China and India are still recording close to double-digit increases in gross domestic product. That provides big support for the economies -- and currencies -- of their neighboring trading partners. Some countries simply supply raw materials, while others, such as Japan, South Korea and Taiwan, profit considerably through projects to expand infrastructure and improve technology.
"China and India will act as a critical mass for the regional economies," says Marc Chandler, head of global foreign exchange at Brown Brothers Harriman in New York. "Countries in their orbit will benefit."
With the dollar now around 110 yen, the Japanese currency is close to its fair value, measured by purchasing power parity, says Fullem. Bank of Tokyo-Mitsubishi anticipates the dollar will shrink to 105 yen by the end of December.
The Australian and New Zealand dollars have been among the bigger beneficiaries of the yen-carry trade; that shouldn't stop this year. Australia's benchmark rate is 6.75% and New Zealand's is 8.25%. While analysts debate the size of the Fed's next rate reduction, speculation in Australia centers on rate hikes. Moreover, the Australian dollar wins on demand for its commodities, such as gold, iron and copper, as well as foodstuffs like wheat and meat.
The outlook for smaller A-Pac currencies is positive, though gains won't match recent years'. The Thai baht rose about 15% against the dollar in 2006, causing the country's central bank to impose capital controls. The controls have been relaxed, and today the baht is stronger than it was at the end of 2006. But Thai authorities, like their counterparts elsewhere in Asia, want to protect their exports by keeping their currencies in line with regional rivals'.
The yuan presents a special case. It will continue to strengthen steadily, closely guided by government control. Non-deliverable forwards, the primary means for investors to gain exposure to the yuan, indicate an 8.5% appreciation for the Chinese currency in 12 months.
"There's no doubt about [the yuan's] direction," says Chandler.
For Barron's subscription information call 1-888-BARRONS ext. 685 or inquire online at http://www.barronsmag.com/subscription/subscription.html.
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