Currency Roadblock Seen by Top Asia Forecaster as Tariffs Loom

(Bloomberg) -- The mini trade deal reached between China and the U.S. earlier this month won’t be enough to sustain the rebound in Asian currencies from a 10-year low, according to the region’s top forecaster.

“The tariffs are a big hindrance,” said Frances Cheung, the Singapore-based head of Asian macro strategy at Westpac Banking Corp., which has topped Bloomberg’s ranking for Asia ex-Japan currencies for four straight quarters. “The China stance has always been that some tariffs have to be done away in order for them to sign a deal. But Trump is using these tariffs as a bargaining chip.”

The world’s two biggest economies agreed, in principle, the first part of a larger trade deal. The initial deal is expected to be signed in mid-November at an Asia-Pacific Economic Cooperation summit in Chile. That’s helped a gauge of Asia ex-Japan currencies advance almost 2% after falling to a 10-year low in early September.

While the truce marked the biggest breakthrough in the 18-month trade fight, some of the prickliest disputes -- such as U.S. accusations of intellectual-property theft and industrial subsidies -- remain. Existing tariffs have not been removed and additional American duties on $160 billion of Chinese goods are scheduled to kick in on Dec. 15, putting its economy even more at risk of sub-6% growth.

“The sequential timing of the tariffs is something they cannot agree on,” Cheung said in an interview. “That is one main obstacle, let alone other structural issues.”

Read related news: Trump Says China Signals Trade Talks on Target for November Deal

Below are more of Cheung’s comments. Scroll to the table at the bottom for changes to her year-end forecasts.

• The yuan will probably weaken to 7.3 per dollar by the end of 2019
  • The People’s Bank of China will continue to loosen monetary policy to support growth; it will probably cut reserve requirements another 50 basis points this year and lower loan prime rates
• The South Korean won, already the biggest loser among emerging Asian currencies this year, could depreciate by another 4.9% by the end of 2019
  • It is “very volatile” and vulnerable to the trade war
• Taiwan’s dollar will find it difficult to sustain its recent rebound as a stronger currency hurts its exports
  • It could decline more than 3% by end-2019
• The Malaysian ringgit will be among the most resilient Asian currencies as economic growth remains sound, with Cheung expecting it to fall less than 1% by the end of December
• Westpac sees the dollar remaining firm even as the Federal Reserve continues to cut rates, partly because economic growth in other developed economies remains low; the bank forecasts two more U.S. rate cuts in 2019 and another two next year

Year-end forecasts

NOTE: Spot price as of 10:39 a.m. in London on Tuesday.

©2019 Bloomberg L.P.