Asia's currency plight not so bad compared to Aussie, NZ dollars
Asia's currency plight not so bad compared to Aussie, NZ dollars
HONG KONG (Dow Jones): Political and economic problems have taken a heavy toll on Southeast Asia's currencies this year, and most continue to sag in relation to the U.S. unit.
Oddly, however, the plight of the Asian currencies doesn't look so bad when they are weighed against the Australian and New Zealand dollars, instead of the U.S. currency, and this has some economists baffled.
The greater political and economic stability of Australia and New Zealand hasn't protected their currencies from the troubles of the Thai baht and Philippine peso. Both the Australia and New Zealand dollars have sunk against the U.S. dollar this year.
The situation raises questions as to whether the foreign exchange market is mis-priced, but there also appear to be economic reasons why rates are where they are, say analysts.
The New Zealand dollar has dropped 11 percent and the Australian dollar 6 percent against the baht since the start of the year, through last Friday. And those currencies have lost 7.7 percent and 2.3 percent, respectively, against the Philippine peso.
The New Zealand dollar has even slipped 4.0 percent against Indonesia's currency, although the Australian dollar has managed a 1.6 percent gain on the rupiah.
Asia's problems have been dutifully noted by the foreign exchange market by way of continued gains in the U.S. dollar's value. But the market has downplayed the political and economic stability in Australia and New Zealand, at least when pricing their units against their Asian counterparts.
The market is "just not where it should be, based on economic fundamentals," said Ong.
Yields, however, show that misalignment may be only part of the explanation.
The Australia and New Zealand dollars have traditionally been considered "high-yield" currencies, based on the premium on interest rates paid on their government debt compared with U.S. Treasuries. But that image is being eroded, a fact that Australian central bankers privately acknowledge even as they publicly blame the market's obsession with the U.S. dollar for their currency woes.
Yield shoppers might favor some Asian investments instead. If you can stand the heat, the Philippine government's five-year bonds were yielding around 17 percent at the end of last week. That compared with 6.05 percent and 6.75 percent, respectively, on the five-year government debt of Australia and New Zealand, and the comparative U.S. Treasury note, at 5.72 percent.
Growth dynamics also support Asian currencies.
Despite much gloom around the region, Morgan Stanley Dean Witter & Co. economist Andy Xie predicts "a substantial out- performance from non-Japan Asia in a slowing global economy" next year.
Non-Japan Asia should grow 6.5 percent in 2001, according to Morgan Stanley. Although that was revised down by 0.2 percentage point in light of oil price rises, it still compares favorably with a 3.9 percent growth expectation for the global economy and the firm's call for 3.6 percent growth in Australia next year.
"The only scenario we see that would make us wrong (on the out-performance of Asia) would be a hard landing for the U.S. economy, the impact of which would be simply too large to offset by other sources of demand," according to Xie.
Current account balances have been among the biggest worries for investors in New Zealand and Australia. They recall current account gaps were a warning sign for East Asia in 1996, months before the region fell into crisis.
Merrill Lynch & Co. is telling investors New Zealand's deficit this year will be 7.2 percent of gross domestic product, albeit an improvement over 1999. It has Australia at a 4.7 percent deficit-to-GDP prediction in 2000 and 4.2 percent deficit in 2001.
At the same time, Merrill pegs non-Japan Asia in surplus to the tune of 3.1 percent of GDP this year and 1.8 percent next.
Monetary policy and regulation have also made a difference in the currency markets. While the authorities in Australia and New Zealand are clearly anxious about the U.S. dollar's upward pace, their preferred management policy is "benign neglect."
Southeast Asian central bankers, however, have shown themselves to be far more proactive. Officials regularly make bold statements on exchange rates and don't fundamentally stamp out whispers that currency controls could be introduced to restore market "order."
Penalties have also been doled out to those suspected of aiding speculators, while tens of millions of dollars have been spent in actual market intervention.