The Big Picture: The Feeble Greenback
The USD has trending down since the COVID-19 shock in March 2020. Anujeet Sareen of Brandywine Global attributes the weaker dollar to the movement toward modern monetary theory, the divergent political transitions in the U.S., Europe, and China, and most importantly, the prolonged structural adjustment still ahead for the U.S. service sector. He adds that U.S. leadership in the technology sector remains robust which likely to limit the degree of U.S. dollar weakness than change the overall negative path for the dollar ahead1.
Chart 1: USD Index year to date (11 September 2020)
Chart 1 source: Bloomberg. Data as of 11 September 2020.
Zeroing In: Selected Emerging Asian currencies outperform
The recent USD weakness is supportive of Emerging Asian currencies and together with stronger fundamentals and policy headroom, Asia local currency could outperform broader Emerging Markets.
However, paths of Emerging Asian currencies have differed year to date not just on the back of the economic and financial consequences due to COVID-19 but also domestic politics.
Topping the chart is the Philippine Peso, which has been the best the performing Asia currency on a year to date basis and experienced low volatility even through the depth of the covid-19 crisis. The allure of the currency had also attracted continued interest in the Philippines government bonds, which rallied year to date.
At the other end of the spectrum, the Indonesia Rupiah and the Thai Baht have seen the most weakness to date. In Indonesia, containment of COVID-19 seems to be lagging its ASEAN peers while a proposal to reduce the Central Bank’s independence has caused market jitters. Over in Thailand, COVID-19 measures have mostly been successful, but the country’s fiscal fundamentals continue to deteriorate as exports and tourism grind to a halt.
Chart 2: The different paths of Emerging Asian currencies
Chart 2 source: Bloomberg. Data as at 11 September 2020.
The bottom line
1 Around the Curve, Dollar Outlook Dims. Anujeet Sareen, CFA, Portfolio Manager, 20 August 2020.
Source: Franklin Templeton, Brandywine Global. Data as of 11 September 2020 unless otherwise stated.
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