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.