The move to increase stimulus measures to boost China's economy is giving little fillip to the yuan, while its proxy currencies climb up the regional leaderboard and look to extend gains.
The Korean won and Australian dollar, which is closely linked to China due to strong export ties, are set to be top the Asia-Pacific currency rankings this quarter. The first three months of the year were marked by the worst performance during the won s ascent. Although China's stimulus may only be playing a limited role in the two currencies' outperformance, the two currencies could still be impacted by the economic downturn.
We are more circumspect that Chinese stimulus present a major positive catalyst for the Australian dollar, said Australian New Zealand Banker John Bromhead, FX strategist at Australia New Zealand Banking Group Ltd. The current investment and stimulus mix is aimed at driving domestic consumption rather than investing heavily in infrastructure. This mix is less steel-intensive, and therefore less bullish for iron ore and the Australian dollar. However, Australia won and Aussie have found other drivers. Bromhead credits the hawkish Reserve Bank of Australia, which unexpectedly raised interest rates this month, as the key catalyst for Aussie gains. The market has displaced expectations for the RBA's terminal cash rate from 3.85% to 4.5%, a major tailwind for the Australian dollar. The Aussie has gained nearly 3% this quarter to 68.85 as of 10 p.m. Hong Kong time on Friday.
Similarly, Nvidia Corp.'s blow-out forecast has helped buoy the gains as foreign investors poured money into tech stocks in Asia, especially in South Korea and Taiwan. Global funds net bought $4 billion of South Korean equities this quarter, and there may be more inflows to come, as some analysts still view Asian chipmakers as cheap despite the rally last month.
The turnaround in the Korean wins has been especially rapid driven by an uptick in inflows amidst an upturn in optimism around AI, says Eddie Cheung, senior emerging markets strategist at Credit Agricole CIB Hong Kong. There are also reports of repatriation of dividends by Korean corporates which is adding to support for the won, Cheung said, adding that he expects the currency to continue outperforming peers in the near term.
The winning surged 2.3% in the third quarter to 1,272. After losing 2.6 percent in the first three months of the year, he will end his career with a net loss of 35.
The nation's economic recovery, however, remains uncertain, weighing on the value of the yuan. It came close to breaching the key 7.2 per dollar level last week as the nation's monetary policy also diverged from the hawkish Federal Reserve following rate cuts.
The People s Bank of China cut the rate on its one-year lending facility by ten basis points on Thursday, following a surprise drop in seven-day reverse repurchase rate by a similar amount Tuesday. Investors will now be watching if the nation's one and five-year loan prime rates are also reduced this week.
For now, wider yield differentials in favor of the US may still undermine yuan to some extent, but if China support measures do gather further traction, then that may help to stabilize yuan sentiments, says Christopher Wong, a FX strategist at Oversea-Chinese banking Corp. in Singapore.
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