Southeast Asian currency carry-trade: the revenant

Actually, the outlook for emerging markets (EMs) has not dramatically changed, unlike that for developed markets.

Since the beginning of this year, the scare over a possible US recession has made the dollar less fascinating, while negative interest rates in Japan have pushed Japanese bond yields, with maturity of up to 30 years, down below zero and made the yen lose its star status as a safe haven. 

Needless to say, the euro and the pound are also facing sell-off pressure from the fear over the UK’s possible ‘Brexit’ divorce from the European Union.

Those macroeconomic events, taken together, create a scenario in which the money has to abandon developed markets and find other shelters, such as Southeast Asian carry trade, which is a more desirable route. 

Judging by returns over the last couple of months, Indonesian rupiah carry trade, for example, has given money managers a world-class return of more than 5 per cent in a very short period.

Regardless of fascinating investment results, the most important questions now are not only “what makes them looks so profitable?” but also “how long should the pattern last?”

Southeast Asian currencies generally move together, but the demands for each currency might be different. When it comes to carry trade, having a high interest rate and a rise in the foreign-exchange rate are key success factors – and the Indonesian rupiah seems to meet both criteria. 

The policy rate in Indonesia is 7 per cent, slightly higher than India’s steroidal interest rate of 6.75 per cent but with a very much lower inflation problem. The credibility of Indonesia’s policy-makers is also high.

Signalling by the Bank of Indonesia works best when the economy gets a stimulus and investors can earn profitable sums, since equity and bond values usually go up after a rate cut.

Regarding the fundamentals, the country displays noteworthy stability given current global volatility. The gross-domestic-product growth rate in Indonesia is forecast to be more than 5 per cent this year, below only that of India and China.

With stable politics, outlooks for both government policies and spending should be able to support the Indonesian economy well.

 In summary, Indonesian rupiah carry trade looks profitable from every aspect. But, it is country-specific and may not be a dynamic for reviving EM currencies in the longer run. 

As stated earlier, EM currency rates are not moving as a result of their own charms. The pullback of US rate hike and a rebound in oil prices were the real factors that resurrected them from the dead. Real currency appreciation should be supported by improving economic conditions, not the depreciation of other currencies.

Back in the early-1980s, two assumptions behind the rise of the Southeast Asian EMs were globalisation and the competitive advantage derived from cheap labour.

Globalisation was seen as irreversible, but it has already gone into reverse as global trade significantly became more tepid following the implosion of 2009. 

Meanwhile, the advantage from cheap labour is far less relevant than it used to be, since how ‘smart’ something is produced may be more important than how ‘cheap’ it is at present.

Southeast Asian currency carry trade is the revenant, if not the walking dead.

The re-emergence of emerging markets is good for the economy and 

 financial markets in the short run, but if a country cannot capitalise on the opportunities and create any further competitive advantages, the baton is surely passed back to the developed world’s markets, which are the centre of innovation.

In Thailand, the baht has also recently appreciated against the US dollar, albeit to a lesser extent than the Indonesian rupiah. The inflows have returned as monetary easing is a current rumour in the market once again. Needless to say, political stress could make a comeback ahead of the referendum on a draft constitution this year and, if the government and the Bank of Thailand cannot communicate with the market well, the moody volatility in the foreign-exchange market will surely return soon.

Bullish market sentiment in Southeast Asian currencies may carry the baht up from the trough with them this time. But in the future, if our economy continues to underperform, our friends might have to leave us for dead – and it may prove too difficult just to be a revenant.

 

Views expressed in this article are those of the author and not necessarily of TMB Bank or its executives. Jitipol Puksamatanan is a global economist and currency strategist at TMB Analytics. He can be reached at [email protected]