Photographer: Chris Ratcliffe / Bloomberg
Photographer: Chris Ratcliffe / Bloomberg
The dollar fell against Asian emerging market currencies on the first day of trading in 2021, a sign of increasing risk appetite among investors as economic data improved and vaccines were launched.
The yuan and the Indonesian ringgit led the attack against the dollar, with the Chinese currency reaching its strongest level since June 2018, after a A series of improvements in purchasing manager indices across the region reinforced sentiment. Gold and cryptocurrency stock assets also rose.
“Uncertainty is decreasing and the strong recovery in global growth should favor the rest of the world, so we think the dollar has an overvaluation to resolve,” said Patrik Schowitz, global multi-asset strategist at JPMorgan Asset Management, which is underweight to the dollar. The weakness of the dollar is likely to be most notable “in relation to the emerging market exchange complex, which is expected to have a cyclical rise and is still relatively cheap”
Investors are putting aside concerns about the increase in virus cases in Asia, betting that China will lead the region in the economic recovery. From the yen to emerging market currencies, companies like Goldman Sachs Group Inc. and BlackRock Inc. is seeing additional gains against the dollar, which could pose challenges for Asians legislatoris concerned about the impact on its exports.
Read: Weak dollar tests Asian economies that expect higher exports
“The USD weakness theme is likely to extend this year and Asian currencies are very well positioned to take advantage,” said Mitul Kotecha, senior emerging markets strategist at TD Securities in Singapore. “Asian exporters have been the main beneficiaries of the malaise elsewhere, with increased exports of electronics and medical equipment.”
After flying to a record high in March, with the worsening of the pandemic, the Bloomberg Dollar Spot Index fell and ended the year 5.5% weaker, its worst annual drop since 2017. Speculative positions against the currency were at most in almost a decade, according to data from the Commodity Futures Trading Commission for the second week of December.
Emerging Rally
The effect of the fall in the US currency is particularly noticeable among Asian currencies in early 2021.
The onshore yuan surpassed the 6.5 level for the first time since June 2018, while the ringgit crossed the 4-level mark against the dollar. The Indonesian rupee jumped more than 1% to its strongest level since last February, amid optimism for a faster economic recovery.
The Chinese yuan is likely to be a “prominent” beneficiary of a weaker dollar thanks to the “erosion of production and twin deficits” that are weighing on the dollar, said Patrick Bennett, strategist at the Canadian Imperial Bank of Commerce in Hong Kong.
The yuan’s yield advantage over the dollar, which is almost the highest on record, is also driving capital flows. Reserve managers likely increased their investments in yen and yuan in the third quarter of 2020, according to a note from Goldman Sachs, based on an analysis of data from the International Monetary Fund.
“China’s growth remains strong as the United States and Europe struggle to contain the virus, and this is helping the yuan to extend a high in the new year,” said Ken Cheung, chief foreign exchange strategist for Mizuho Asia. Bank Ltd. “We expect the yuan to gain even more 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 appearing in other asset classes, with a global equity indicator heading for another high. Gold reached its highest level in almost two months, while the digital currency Ether reached a record on Monday.
– With the help of Lilian Karunungan