Currencies across the Asia-Pacific region swept higher at the end of last year, boosted by the thaw in trade tensions between the US and China. Then the coronavirus outbreak hit, obliterating the gains.
After an almost 4 per cent rally in December, the Australian dollar stumbled last week to its weakest point in almost a decade. The currencies of Thailand and Singapore have also swooned after the central banks there flagged risks to their economies from disrupted supply chains and weakened Chinese tourism.
Christy Tan, Asia head of markets strategy and research at Melbourne-based banking group NAB, said “essentially everyone” had expected markets to stabilise and economic activity to improve after the US and China signed a trade war truce in December. Now, markets are pointing to sharply slower growth.
“From a trade war to a war against a virus,” she said. “It’s a shock to financial markets, to the global growth situation.”
The Chinese central bank’s efforts during the trade war to fend off bets against the renminbi made traders more inclined to target other currencies in the region when the outbreak became more serious, Ms Tan added.
Australia has the worst performing major currency in the region, despite the central bank playing down the virus’s impact. “It’s been a pretty poor run”, said Daniel Been, head of forex strategy at ANZ, another Melbourne-based lender. The currency has sunk 4.3 per cent against its US counterpart in 2020.
Mr Been said that despite an improving outlook for the country’s labour market, the Australian dollar has “become the easy proxy” for expressing fears about the growth outlook in Asia, particularly China.
The drop came at a painful time for investors and traders, who had been warming to the currency. Negative bets in the futures market targeting the Australian dollar halved between December 17 and January 21, reaching the lowest level in 20 months, according to reports from the US Commodity Futures Trading Commission.
Mansoor Mohi-uddin, senior macro strategist at NatWest Markets, said both the hit to activity and the immediate reaction from some central banks were cause for concern, as they reflected how vulnerable economies in the region might prove to be.
The Bank of Thailand unexpectedly cut interest rates last week, sharpening a sell-off for the Thai baht, which is now down 4 per cent this year, after a 10 per cent rise in 2019. Chinese tourists accounted for more than a quarter of the 38m people who visited Thailand last year, and arrivals at the kingdom’s main airports have tumbled since travel restrictions were tightened.
“A weak baht is a boon for the economy,” said Prakash Sakpal, an economist with ING Bank. “But what’s driving it is the adverse impact of the virus on tourism, and that’s not a good source of weakness.”
Analysts said they expected the coronavirus to disrupt the leisure and travel sector for several months, as the Sars outbreak did in 2003. “If we take the Sars impact as guidance, we will take a hit over one to two quarters,” said Suchart Techaposal, head of research for Thailand at brokerage CLSA Securities.
A similar pattern is emerging elsewhere. South Korea’s currency, the won, is down 2 per cent this year, while Singapore’s dollar has fallen 2.8 per cent against the greenback. Most of those losses came following the surge of coronavirus cases in China that began in mid-January.
The Australian dollar’s decline against the greenback in 2020
The sell-off sharpened last week after the Monetary Authority of Singapore said there was “sufficient room within the policy band to accommodate an easing” of Singapore’s main policy tool, the exchange rate, to reflect the economic weakening caused by the coronavirus.
DBS, Singapore’s biggest bank, has lowered its 2020 gross domestic product growth forecast for Singapore to 0.9 per cent, from 1.4 per cent previously, citing a drop of 1m tourist arrivals for every three months Singapore’s travel ban on Chinese passport holders is upheld.
Margaret Yang, an analyst at CMC Markets, said the MAS statement had accelerated the currency’s fall, adding it remains under pressure because “the downward economic pressure is obvious”.
Despite this burst of currency weakness across the region, the tightly regulated onshore rate for China’s renminbi has weakened just 0.4 per cent this year. Analysts said moves by the People’s Bank of China to support the country’s economy, including a cash injection into short-term borrowing markets, had helped prevent a steeper fall.
That has limited the pressure on other exporters in the region, whose currencies would be forced lower by a weaker renminbi in order to remain competitive. But Ms Tan warned that traders would continue placing bets against the renminbi’s peers in the region until the situation in China improves.