Oddly, this currency has become the best performer among emerging Asia
Political turmoil and strengthening currencies rarely go hand in hand.
Yet in South Korea, which is knee-deep in a political crisis that has just led to the impeachment of the country’s president and the indictment of the head of the nation’s most prominent company on bribery charges, the won is on a tear.
South Korea’s currency, the most actively traded currency in emerging Asia, has shot up nearly 6 per cent against the US dollar since the start of this year.
If even the won – which in addition to the threat posed by the country’s political crisis is also vulnerable to the protectionist policies pledged by US President Donald Trump given South Korea’s large bilateral trade surplus with America – is surging, then investor sentiment towards emerging Asia must really be upbeat.
Indeed it is. All the region’s main currencies have strengthened versus the greenback since the start of this year. The Taiwan dollar is up 5.2 per cent, the Thai baht has gained 3.3 per cent while both the Malaysian ringgit and the Indonesian rupiah have strengthened just over 1 per cent.
The Indian rupee, meanwhile, which has appreciated 5.4 per cent against the dollar since the beginning of 2017, has just enjoyed its best quarterly gain in more than four years. While the rupee was given a lift by last month’s thumping election victory for Prime Minister Narendra Modi in the important state of Uttar Pradesh, the main reason behind the currency’s sharp appreciation is the recent surge in inflows into India’s local bond and equity markets.
According to Bloomberg, foreign purchases of Indian equities and domestic debt surged by US$5.5 billion in the first quarter of this year – the biggest increase since mid-2011 – as investors were drawn to the country’s higher-yielding assets. The surge in inflows is pushing up the rupee, already buoyed by signals from the country’s central bank that its monetary easing cycle has run its course. The Reserve Bank of India may even have to step up its interventions in the currency markets to weaken the rupee if the pace of inflows accelerates further.
The rally in emerging Asia’s markets marks a dramatic shift in sentiment since the weeks following Trump’s upset victory in the US election.
According to JPMorgan, foreign investors sold US$9 billion of emerging Asian domestic debt in November and December last year as the dollar and US Treasury yields surged due to expectations of faster growth and inflation under the Trump administration.
Yet since then, the “Trump trade” has lost momentum - and in some cases has gone into reverse - as investors start to question the political underpinnings of Trump’s economic policies. The dollar index, a gauge of the greenback’s performance against a basket of currencies, has lost 2 per cent since early January while the yield on benchmark 10-year Treasury bonds has fallen 25 basis points since mid-March to 2.38 per cent.
In one of the clearest signs that investors are voicing serious doubts about the Trump trade, the exporter-heavy Nikkei-225 Index, Japan’s main stock market index which surged 17.5 per cent in the period between the US election and the end of last year, is down 2.3 per cent this year as the yen has risen 5 per cent against the dollar.
JPMorgan notes that Trump’s failure to win Congressional approval for his health-care reforms on March 24 – the main source of investors’ concerns about his ability to deliver much-anticipated tax reform – is “good news” for emerging market assets due to the ensuing weakness of Treasuries and the dollar.
Yet emerging Asia’s currencies are by no means a one-way bet.
Among the countries that the Trump administration is currently probing for possible “trade abuses”, more than half are in Asia.
While China has the biggest bilateral trade surplus with the US, South Korea and Vietnam also run hefty surpluses with America. According to the International Monetary Fund (IMF), South Korea’s current account surplus as a share of GDP last year was 7.2 per cent of GDP, while those of Singapore and Taiwan amounted to 19 per cent and 15 per cent respectively. Research from the Peterson Institute for International Economics suggests these surpluses are linked to undervalued currencies, increasing the scope for some of these countries to be designated currency manipulators.
Yet given last week’s escalation in military tensions between Washington and Pyongyang, it is unlikely that the US will punish Seoul given its importance in managing the standoff on the Korean peninsula.
The won’s rally may have further to run.
Nicholas Spiro is a partner at Lauressa Advisory