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Currencies
Opinion
Neal Kimberley
Neal Kimberley

Macroscope | Why US-China monetary policy split could be good news for currency investors

  • Hawkish sentiment in the US and more easing in China could leave policymakers in Asia-Pacific countries exposed to both in a difficult spot
  • For currency investors who are adept at reflecting changing circumstances and identifying value, though, this divergence spells opportunity

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Locals and tourists watch a sunset from Phuket Island’s Phromthep Cape in Thailand. The Thai central bank’s struggle to deal with inflation while sustaining economic growth could signal to currency markets that the baht is somewhat exposed. Photo: Reuters
Neal Kimberley

Imagine the Asia-Pacific region as a Venn diagram of two overlapping circles, one circle representing China and one the United States. Where the two circles overlap are the other countries in the region, economically exposed to both China and the US and left facing monetary policy dilemmas when the Chinese and US central banks are following divergent trajectories.

From a currency market perspective, this scenario spells opportunity. The foreign exchanges are adept at reflecting changing circumstances and identifying value.

In the Asia-Pacific, a combination of rising commodity and food prices at a time when China’s continuing adherence to a zero-tolerance approach to Covid-19 is helping shape a monetary policy trajectory in Beijing that stands in sharp contrast to that of the US. This complicates policymaking, but the foreign exchanges will nevertheless look to identify currency winners and losers.
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Outside Japan, which has sought to eliminate a deflationary mindset for decades, higher inflation derived from rising commodity and food prices is usually perceived as bad news for consuming nations, though less so for economies where commodity and food exports are materially important.

As it is, the Bank of Japan is sticking resolutely with ultra-accommodative monetary policy settings, attempting to craft conditions in which a degree of moderate but sustained price inflation will materialise. This stance arguably favours the use of the Japanese yen as a funding currency against other currencies that are considered to have room to strengthen.

03:17

Japan beef bowls and coffee costing more as workers feel the pinch from food price hike

Japan beef bowls and coffee costing more as workers feel the pinch from food price hike
In China, while continuing efforts to contain Covid-19 mean the Chinese economy is not firing on all cylinders, and while the People’s Bank of China still has more room to ease monetary policy, the China-Japan yield differential still favours China’s yuan over the yen.
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