Renminbi’s jump portends dollar woes ahead

The dollar sunk against Asia’s emerging-market currencies on the first trading day of 2021, a sign of the growing risk appetite among investors as economic data improved and vaccines are rolled out.

The yuan and Indonesian rupiah led the charge against the greenback, with the Chinese currency surging to its strongest since June 2018 after a slew of improving purchasing managers indexes across the region bolstered risk sentiment. Assets from stocks to gold and cryptocurrencies also rallied.

“Uncertainty is diminishing and the strong global growth recovery should favour the rest of the world, so we think the USD has some overvaluation to work off,” said Patrik Schowitz, global multi-asset strategist at JPMorgan Asset Management, which is underweight the dollar. The dollar’s weakness is likely to be most notable “against the emerging markets FX complex, which should have cyclical upside and is still relatively cheap”.

Investors are brushing aside concerns of rising virus cases in Asia, wagering that China will lead the region in economic recovery. That should lead to more yuan strength — the linchpin for Asian currencies’ gains and one that would fuel ongoing demand for the assets as the world recovers from the pandemic, according to strategists from BNY Mellon Investment Management.

From the yen to emerging-market currencies, the likes of Goldman Sachs and BlackRock  are also seeing further gains against the dollar, which may present challenges for Asian policymakers worried about the affect on their exports.

“The USD weakness theme is likely to extend into this year and Asian currencies are very well placed to take advantage,” said Mitul Kotecha, senior emerging markets strategist at TD Securities in Singapore. “Asia’s exporters have been key beneficiaries of the malaise elsewhere, with electronics and medical equipment exports rising.”

After soaring to a record high in March as the pandemic raged, the Bloomberg Dollar Spot Index fell, and ended the year 5.5% weaker, its worst annual decline since 2017. Speculative positions against the currency were at the most in almost a decade, according to data from the Commodity Futures Trading Commission for the second last week of December.

Emerging rally

The onshore yuan rose as much as 1.1% on Monday and breached the 6.5/$ level for the first time since June 2018. The Malaysian ringgit crossed the 4 mark against the dollar, while the rupiah jumped more than 1% to its strongest level since last February amid optimism for a faster economic recovery.

The rupiah is still undervalued, and the central bank will provide ample room for it to appreciate, according to Nanang Hendarsah, executive director for monetary management at Bank Indonesia. Currencies from the Korean won to the Thai baht also rallied.

China’s renminbi is likely to be a “standout” beneficiary from a weaker dollar thanks to “yield erosion and twin deficits” that are weighing on the greenback, said Patrick Bennett, strategist at Canadian Imperial Bank of Commerce in Hong Kong.

The yuan’s yield advantage over the dollar, which is near the widest on record, is also driving capital inflows. Reserve managers probably increased their holdings of the yen and the yuan in the third quarter of 2020, according to a Goldman Sachs note, based on an analysis of data from the International Monetary Fund.

 “China’s growth remains strong while the US and Europe struggle to contain the virus, and that is helping the yuan to extend a rally into the new year,” said Ken Cheung, chief Asia foreign-exchange strategist at Mizuho Bank. “We expect the yuan to gain even further from here, as China will lead the world in terms of economic recovery in the first half. The currency may test 6.3 in the coming months.”

Risk appetite is showing up in other asset classes, with Asian stocks hitting another high. A weaker dollar is also driving demand for alternatives, with gold climbing to its highest level in almost two months while the digital currency Ether surged.

Bloomberg