Morgan Stanley is Bullish on Asian Currencies

Today’s Currency Outlook from Morgan Stanley "reiterates our call that USD/Asia will show a definitive downtrend in 2006." 

Why? "The Fed is not yet done with its tightening campaign and could help support the dollar, particularly against the JPY. However, as the global recovery matures and broadens, we believe Asia will be a major beneficiary. The Fed and USD/JPY may temporarily disrupt this downtrend, but will not prevent or reverse it."

The report highlights several points:

Point 1.   CNY and JPY are the two remaining structural tension points in the currency space, as they are undervalued. 

Point 2.   Global growth is very robust.

Point 3.   The official reserves of several countries in Asia have reached or are approaching ‘saturation’ levels. 

Point 4.   Currency politics from the US are heating up.

Point 5.   China likely to be ready to impart more currency variability in USD/CNY.

Lastly, the Fed and USD/JPY Will Disturb, Not Reverse this Trend

Bottom Line: "We continue to believe USD/Asia should show a distinct downtrend this year.  Robust global growth, mispriced JPY and CNY, saturating official reserves, and currency politics are some of the drivers we see propelling the Asian currencies higher."


Note that I am not a currency trader (far from it) but I watch
currencies as part of my macro overview. I recall a little incident with USD and a certain Treasury Secretary causing a little commotion about 19 or so years ago . . .

See also: U.S. Weighs Harder Line With China on Yuan


Asian Currencies Poised to Appreciate in 2006
Stephen L. Jen and Luca Bindelli and Charles St-Arnaud (all in London)
Morgan Stanley Economic Research, Feb 20, 2006

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  1. B commented on Feb 20

    I hope MS is wrong. I do believe their conclusions are highly inaccurate. Would Robert “Beefy Dollar” Rubin agree with their conclusions? If the dollar falls, ain’t nothing but more rate hikes and a slower global economy going to come to pass. Can you say more inflation via imported goods? More inflation due to reduced foreign appetite to invest in American capital markets? Reduced capital flows to developing countries? More risk and instability in those third world economies because if it? Bottom line is a weak dollar will surely cap global growth and cause more inflation. Those who say it helps exporters are definitely are definitely guilty of an incomplete sentence.

    I hope the politicians will refrain from saying and/or doing things that have unforeseen second and third order disruptions. Not that fiscal irresponsibility helps anything.

  2. miami commented on Feb 20

    Stephen Jen does excellent work. [I used to work in currencies for two major banks] However, the currency pros have been calling the JPY undervalued for years and years. It hit 102 and then came right back to this level. I can certainly see it hitting 110-108 again this year, however.
    China will not dramatically change anytime in the near future. Renminbi could have an 8-handle on it for a while.

  3. Sean commented on Feb 20

    To dovetail with Barry’s topic of rigor…

    What’s his track record?
    Is his work excellent because he gets you in on trend changes early, or is he excellent because he uses exquisitely good logic (even though he misses the turning points?)

    If he’s good because of logic, but he still has a bad batting average, then he’s just another ‘Wrong Way’ Corrigan…

    Except of course Wrong Way’s story was not as simple as folklore paints it. He may have actually been trying to go to Ireland!

    – Sean

  4. pjfny commented on Feb 20

    B…..Rubin has publicly stated that he is worried about a dollar crisis/loss of confidence.
    The turning point in dlr/yen will come when the yen carry trade gets too overcrowded and the anticipation of bk of japan change in liquidity policy will put fear in this overcrowded hedgefund trade (soon IMHO). Because this trade is very onesided, the change in perception/risk tolerance, will make the turn much more violent.

  5. GRL commented on Feb 20

    I realize the topic of the day is currencies, but Andy Xie’s excellent commentary a few inches further down the page is also worth a mention.

    The global stock market is also overvalued, I believe. While P/E multiples for developed markets are within the normal range, earnings may have been exaggerated by asset-driven demand. The rising share of financial earnings is a case in point. Emerging markets are already overvalued by historical norms, in my view.

    The total capitalization of stock markets around the world is about US$36 trillion or 90% of global GDP, quite close to the high in 2000. The exaggerated earnings linked to strong Anglo-Saxon consumption, the financial sector, and the commodity bubble may have exaggerated market capitalization by 15-20%.

    * * *
    [A] third scenario is emerging. The deflationary force from China is no longer effective in keeping inflation down in high-inflation economies. The transmission mechanism between China’s cheap labor and overcapacity and the consuming economies is trade.

    In the past five years, industries that compete against China have been moving to China. China’s FDI in manufacturing dropped by 14% in 1H05 from the year before. All indications are that factory relocation to China has peaked. When China’s exports are small, its deflationary impact is huge as it was a price setter for producers elsewhere. As factories that compete against China have moved to China, when China cuts prices, it no longer has the same effect.

    This would suggest that inflation would surprise on the upside among the consumption-led economies. . . .

  6. calmo commented on Feb 20

    It doesn’t seem that long ago that Japan was the major currency player (Mar 03?) and important tbill purchaser. So it seems to be there is room to open that door(s) again to maintain suitable currency levels. ( ie. a suitably strong dollar.)
    Atleast for awhile –the while that allows the US consumer to continue with the credit instruments at his disposal in order to obtain those goods and services that are increasingly not coming from the US.

  7. B commented on Feb 20

    Things shaping up to be an interesting 06. I’m not too worried about a currency crisis as imminent in the short term or long term but one never knows when events will unfold to create one. There are headwinds to be concerned of if the sun, moon and stars align. That scenario isn’t playing out yet. I do think MS is wrong to think appreciating Asian currencies benefits their economies short term. Long term, we’d have to see. But then, from what is posted, I don’t see any logic behind their thinking either. That’s the problem with many prognosticators. They don’t have any great logic for their reasoning or haven’t thought through the impacts of their statements. Plus, they are just guessing as forecasting is folly to steal from Barry.

    As far as global equity market valuations, I whole heartedly agree emerging markets are overvalued. But, there is also tremendous wealth creation in those economies. I don’t agree America is fairly valued. Nor is Japan. Both are very richly valued by any historical measure. I don’t focus too much on Europe so I can’t make much comment there.

    If any crisis in equities, economies, currencies or of other origin do arise, historically, the flight to quality is to dollar denominated assets and investments. I don’t see any reason why that scenario has changed….but, if it does, I’d likely punt on third down.

  8. PC commented on Feb 20

    USDJPY certainly has the looks of topping out (i.e. Yen weakening against Dollar near an end) on its charts. If it cannot get above 120, then odds are high that it will turn down.

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