From NYT’s Dealbook
China’s decision to push the value of its currency lower has opened a new front of worry for global investors: a potential wave of currency devaluations among the so-called Asian tigers — South Korea, Singapore and Taiwan.
Such an outcome, a number of foreign exchange specialists say, would put a further damper on global growth expectations, which already are being revised downward as China’s once-booming economy retrenches.
The dollar’s strong run recently — together with the plunge in the price of oil and other commodities — has damaged fragile emerging-market economies like Brazil, Turkey and South Africa; the dollar has risen 130 percent against the Brazilian real and the South African rand since mid-2011.
The currencies of fast-growing Asian countries, including India, have largely been insulated, thanks to their better-performing economies and their ability to stockpile large foreign currency reserve positions.
… countries have some of the most overvalued exchange rates on the planet,” said Julian Brigden of Macro Intelligence 2 Partners, an independent research firm based in Vail, Colo., that advises large money management firms on global investment themes.
When economies have high exchange rates, their exports tend to lose market share compared with countries with cheaper currencies. And when that happens, countries that depend on foreign trade will frequently take steps to push their currencies lower.
But having a strong currency at a time when manufacturing competitors like Japan and China have weaker currencies leads to a sharp fall in exports, which have been the economic lifeblood of these countries for decades.
Already, global money managers have begun to pull money out of some of these Asian markets.
The Korean won and the Singapore dollar are down 5 percent, while the Taiwan dollar has lost 7 percent over the last six months. Even in India, perhaps the most popular emerging market among global investors, the currency has given ground, about 7 percent, against the United States dollar.
“I expect these currencies to fall by another 20 or 30 percent,” said Raoul Pal, an independent financial analyst and the founder of Real Vision TV, a media venture where sophisticated investors discuss their views on the market. “These export figures are a big deal — it’s a huge shrinkage in the dollar-based economy, as not enough people are buying goods.”
For quite some time, Mr. Pal has been promoting an investment thesis that the relentless rise of the dollar — since mid-2011, the dollar is up 35 percent against a broad basket of currencies — will have a deflationary effect on the global economy as export-driven economies enter into a series of competitive devaluations to protect crucial export sectors.
“This is not just a commodity story,” he said. “It’s a global trade story.”
Exchange-rate volatility in this part of the world will not take the heat off other weak currencies. In addition to usual examples like Turkey, Brazil and South Africa, investors expect commodity exporters like Indonesia, Chile and Colombia to take a big hit, as the prices for their products continue to fall.
The final frontier in this respect would be the pegged currencies in the Middle East, especially the Saudi Arabian riyal, which is tightly linked to the dollar.
The other problem with downward trending currencies in South Korea, Taiwan and Singapore is that these countries, like just about all emerging market economies, have taken advantage of a rock-bottom interest rate environment to issue billions of dollars in dollar-denominated corporate debt to finance capital investments.
Foreign investors were attracted to the high yields and especially the stable currencies and bought them in huge quantities. Now, with the currencies starting to wobble, dollar-based investors have less incentive to hold on to them, and they will do what they have been doing with their Brazilian, Turkish and South African bonds — get rid of them as quickly as possible.
“There is a lot of underlying investor exposure in these markets,” said Mr. Brigden, the independent research analyst. “I think if things continue to get worse, we are going to move to liquidation stage.”