China has been at the forefront of currency and financial markets, not so much as it pertains to the absolute FX movement so far in 2010, but more due to the sheer size of the economy and its impact on global markets.
China has been recovering since the crash. Surpassing Germany as the world’s largest exporter, it was quite prone to the world’s problems, and exports plunged 17.5% y/y in January, which translated into a slowing in GDP growth to 6.2% y/y in Q1 2009. However, China unveiled a huge fiscal stimulus package, which helped support domestic demand along with credit and monetary easing.
Now, the Chinese are scaling back such measures and even raising capital requirements (reserve ratios) of the banks to start to unwind these programs and prevent an overheating, which could happen if global growth truly turns out to be on the rise. Thus, the Chinese have been influential on the global markets, and any news out of China has had a fairly large impact on the risk-sensitive currencies.
Due to China’s sheer size, the world is keen to see any of its economic reports, and if they are positive, this is viewed as positive for numerous currencies – especially the Australian dollar, due to Australia’s important trade relationship with China. Although risks remain, the Chinese economy looks poised to recover, albeit at a slower rate than before. This will continue to be a driver for the global economy even amidst problems that are prevalent in Greece and Europe.
As for the Yuan, the currency has flat-lined against the USD over the last few months. The broad-based strengthening of the USD has taken the heat off the Chinese to relax their monetary constraints (at least for now), and, therefore, the CNY has not continued its strengthening trend. However, it has strengthened up against many of the other major currencies as their value has fallen off against the USD. We do feel that the CNY will likely resume its strengthening trend once the economic uncertainty subsides.
In the other emerging countries of Asia, currency volatility has subsided some and relative fundamentals are starting to come back into play, although the larger risk picture continues to be the largest driver of aggregate movements. In South Korea, the Won has strengthened, but the trend is less strong at these levels, although it hasn’t fully regained losses sustained during the flight to safety months of the crisis. All major economic figures are bouncing back, and unless there is a strong double dip in equity markets, which will drive investors out of Korea and other emerging market countries, then we feel the trend for a higher Won will continue.
The same is true for India, another area of interest in the new world economy. India’s industrial production numbers rose 16.8% y/y in December, the largest increase in more than 15 years. The INR has had a similar fate as Korea’s currency, losing significant value during the crash but strengthening considerably since. It is interesting to note that the currency has moved in tandem with the KRW, which shows the strong relationship between risk and emerging market currencies.
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