World’s Best Forecasters Split on Views for Asian Currencies

(Bloomberg) -- The two best forecasters of emerging Asian currencies have very different views about where the region’s battered foreign-exchange rates are going next as the coronavirus ravages global markets.

Commerzbank AG, which came first last quarter in Bloomberg rankings, says Asia’s currencies should benefit from a weaker dollar with the Indonesian rupiah, Indian rupee and South Korean won leading the recovery. Second-placed Credit Agricole SA says the dollar is poised to strengthen versus its Asian peers, though reduced visibility about the spread of the virus makes it difficult to predict with much confidence.

“We are keeping most of our forecasts for Asian currencies from the start of the year and expect them to recover somewhat from losses caused by the coronavirus,” said Hao Zhou, a currency and emerging-market analyst at Commerzbank in Singapore. “After all, the dollar has lost its long-held yield advantage as the Federal Reserve has slashed rates.”

The spread of the deadly pandemic has pummeled emerging markets this year as investors have put their money into havens such as the dollar and U.S. Treasuries. The Bloomberg JPMorgan Asia Dollar Index, which tracks 10 of the region’s exchange rates excluding the yen, has tumbled 3.6% since the end of December and last month touched the lowest level since September 2004.

Not only has the virus caused heavy losses in risk assets, its unpredictability has made forecasting currencies increasingly difficult. The uneven spread of the pandemic, combined with a price war in oil markets, has pushed up volatility in emerging-market currencies to the highest level since late 2011, adding to the challenges facing analysts.

Despite the turmoil, Commerzbank is expecting Asian currencies to appreciate, saying the spread of the virus in the U.S. will hinder further gains in the dollar. The company is predicting the rupiah will strengthen to 14,900 per dollar by year-end, from around 16,060 as of 1:34 p.m. in Singapore on Thursday, while the rupee will advance to 73 from around 76.40, and the won will climb to 1,190 from 1,220.

The Frankfurt-based bank has also revised up its end-year forecast for China’s yuan to 7.10 per dollar from its earlier prediction of 7.23, saying the local authorities should keep the currency in a tight range as they have done in previous crises.

“If the Chinese yuan can be stable, we won’t see very rapid depreciation of other Asian currencies,” Commerzbank’s Zhou said.

For Credit Agricole, Asian currencies are likely to face further selling as the worst of the virus pandemic may still be ahead.

“We recommend long-dollar positions against Asian currencies in general, anticipating a major prolonged economic and market impact of the virus and drawing from lessons of the global financial crisis,” said Dariusz Kowalczyk, chief China economist and senior emerging-market strategist at the company in Hong Kong.

Vulnerable Currencies

Credit Agricole expects to see the biggest losses in the won, rupee and rupiah if the situation worsens, Kowalczyk said. India and Indonesia are vulnerable to portfolio outflows due to their current-account deficits, while the South Korean currency is volatile because it’s considered a proxy for trading foreign-exchange risk in the region, he said.

The rapid spread of the virus has meant Credit Agricole needed to reassess the assumptions underlying its currency forecasts several times, Kowalczyk said. The first was to factor in the greater perceived impact on China and its neighbors, while later it reworked its modeling to incorporate the global spread of the pandemic.

The current environment is one of the most difficult in 20 years of covering markets due to the “increased market volatility, limited visibility and greater uncertainty of the economic and policy backdrop,” Kowalczyk said.

©2020 Bloomberg L.P.