Photographer: Chris Ratcliffe / Bloomberg
Photographer: Chris Ratcliffe / Bloomberg
The dollar sank against the emerging market currencies in Asia on the first trading day of 2021, a sign of the growing risk appetite among investors as economic data improves and vaccines are rolled out.
The yuan and Indonesian ringgit led the charge against the greenback, with the Chinese currency rising to its strongest since June 2018 after a quite a few improved indices for purchasing managers across the region boosted sentiment. Assets of equities to gold and cryptocurrencies also rose.
“Uncertainty is declining and the strong global growth recovery should benefit the rest of the world, so we think the dollar has some overvalue to work off,” said Patrik Schowitz, worldwide. multi-asset strategist at JPMorgan Asset Management, which underweighted the dollar. The weakness of the dollar is probably the most notable “against the FX complex of emerging markets, which should have an upward cycle and remain relatively cheap.”
Investors are clearing up concerns about increasing virus outbreaks in Asia and betting that China will lead the region into economic recovery. From the yen to emerging market currencies such as Goldman Sachs Group Inc. and BlackRock Inc. see further gains against the dollar, which could pose challenges for Asia policy makers concerned about the impact on their exports.
Read: Weak dollar tests Asian economies hoping for higher exports
“The USD weakness theme is likely to expand this year and Asian currencies are very well able to benefit,” said Mitul Kotecha, senior emerging markets strategist at TD Securities in Singapore. “Asia’s exporters have been the biggest beneficiaries of the disease elsewhere, exporting electronics and medical equipment.”
After soaring to a a record high in March when the pandemic raged, the Bloomberg Dollar Spot Index fell and ended the year 5.5% weaker, its worst annual decline since 2017. Speculative positions against the currency have been at their highest in almost a decade, according to data from the Commodity Futures Trading Commission for the second last week of December.
Upcoming rally
The effect of the move of the US currency is particularly noticeable among Asian currencies as 2021 began.
The national yuan crossed the 6.5 level for the first time since June 2018, while the ringgit crossed the 4 level against the dollar. The Indonesian rupiah has jumped more than 1% to its strongest level since last February amid optimism for a faster economic recovery.
China’s yuan is likely to be a ‘noticeable’ beneficiary of a weaker dollar thanks to ‘yield erosion and twin deficits’ weighing on the greenback, said Patrick Bennett, strategist at the Canadian Imperial Bank of Commerce in Hong Kong.
The yuan’s yield advantage over the dollar, which is the largest record, also drives capital inflows. Reserve managers likely increased their holdings of the yen and yuan in the third quarter of 2020, according to a Goldman Sachs note, based on an analysis of data from the International Monetary Fund.
“Growth in China remains strong as the US and Europe struggle to curb the virus, helping the yuan expand a rally in the new year,” said Ken Cheung, chief foreign exchange strategist at Mizuho Bank. Ltd. said. “We expect to get the yuan even further from here as China will lead the world in terms of economic recovery in the first half. The currency could test 6.3 in the coming months. ”
The risk appetite also occurs in other asset classes, with a benchmark of global equities heading for another high. Gold climbed to its highest level in almost two months while the digital currency Ether reached a record on Monday.
– Assisted by Lilian Karunungan