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The USD has risen against Asian currencies recently but economists at HSBC doubt the greenback can rebound significantly. They believe fundamentals should play a bigger role for EM currencies, giving an edge to Asian currencies, in particular, the Chinese yuan. 

Key quotes

“As suggested by the latest ‘dot plot’, the Federal Open Market Committee (FOMC) is committed to keeping interest rates low for a long time under the new average inflation targeting framework. Meanwhile, the US election is approaching and the US Congress has yet to break the impasse in additional fiscal stimulus, so some market participants could be feeling nervous about being too overweight US assets.”

“We believe local factors should matter more for emerging markets (EM) currencies, namely the growth outlook and macro-policy settings that will shape whether capital inflows can increase. CNY resilience is supported by domestic reasons. China’s economic recovery is broadening out. If the growth indicators keep improving – soft and hard data – then this could broaden up preferences for EM currencies. For now, we emphasise the regional preference for Asian currencies, given the greater connectivity to China.”

“There are medium-term structural factors that are positive for the CNY, such as the yuan internationalisation and portfolio diversification by global investors. On 24 September, FTSE Russell decided that China bonds are eligible for inclusion into the World Government Bond Index (WGBI), with the phased-in inclusion process tentatively scheduled to begin in October 2021 and conclude in September 2022. (source: Bloomberg, 24 September). Strong portfolio inflows could continue next year.”