The yen hit three-year lows against the dollar throughout January (touching ¥134.93 at time of press), prompting alarm from the region’s politicians, and raising the spectre of tit-for-tat devaluations, particularly among the pegged currencies – the Chinese renminbi, Malay- sian ringgit and Hong Kong dollar. “The weaker the yen, the higher the pressure on these currencies,” comments Frank Gong, senior interest rate and currency strategist at Bank of America in Hong Kong. “Whether there will be a possible devaluation depends on the governments’ policies.”
China’s central bank chief, Dai Xianglong, and Malaysia’s prime minister, Mahathir Mohamad, have both voiced their concerns about the yen’s slide in recent weeks, noting that it could exert serious pressure on the region’s currencies. The yen has depreciated by more than 12% against the US dollar since September, with the apparent blessing of Japan’s banking officials as a way of revitalising the moribund Japanese economy. But many bankers believe the fears of devaluations could be exaggerated. “I suppose we’re at the stage where political rhetoric is destined to get louder and louder,” notes James Malcolm, regional forex strategist at JP Morgan Chase in Singapore. “I think in terms of the real impact, though, it is probably easy to exaggerate.”
Malcolm predicts the yen may reach ¥138 by the end of the first quarter, but says this level is unlikely to have a knock-on effect on the competitiveness of the region’s currencies, particularly with the global economy showing tentative signs of recovery. He adds that China has been steadily increasing its share of the export markets, which is unlikely to be impacted by the yen at these levels. “We wouldn’t expect there to be specific pressure on the peg there because, in trade-weighted terms, it is not looking over-valued,” he says.
Geoffrey Barker, chief economist, Asia-Pacific at HSBC in Hong Kong, agrees. He predicts the yen will reach ¥137 by the second-half of 2002, but says that a much larger depreciation is needed to really affect the renminbi peg. “Chinese exports are rising at double-digit rates at the moment,” he says. “So, will ¥140 put paid to all of that? I really don’t think so.”
However, the Malaysian ringgit peg may be more vulnerable from yen weakness, notes Mansoor Mohi-uddin, foreign exchange strategist at UBS Warburg in Singapore. “A country such as Malaysia, where the currency is pegged, has lost relative competitiveness compared with the rest of Asia,” he says. “The concerns that the authorities will look at the peg if the yen gets above ¥140 may well be justified.” Meanwhile, implied one-month volatility on dollar/yen has picked up slightly to around 10.5–10.75% from 9.5% in early January, following the yen’s slide to below ¥134, but bankers note that it remains muted by historical standards. “It was a bit lower last year, but it’s not picked up significantly,” says Malcolm.
“Volatility’s not been immense,” adds Mohi-uddin, noting that one-month 25 delta risk reversals are at around 0.7 vol in favour of the dollar, against two vol in the first quarter of last year. NS