Asian block currencies poised to appreciate

Key News

  • China may raise interest rates in the second quarter and economic growth could reach 9.5 percent this year, the China Securities Journal reported on Wednesday, citing central bank advisor Li Daokui. (Reuters)
  • Comment: It is about time China hikes rates. With inflation likely bubbling, and growth smoking, a hike by China would be no surprise. We have been expecting the same from central banks across Asia given their relatively high growth and low interest rates. A move on rates coupled with China letting its currency move higher (albeit much less than it should) should lead the way for continued strength in Asian block currencies ex-Japan. This is why we continue to like pairing the Asian block currencies, which are extremely undervalued, against the Euro block currencies, which we believe are still overvalued.

    US (black) versus China (red) Yield Curves:

    Source: Reuters

  • Emerging-market stocks rose for a ninth day and the Taiwan dollar led gains in higher-yielding currencies after the Federal Reserve indicated U.S. interest rates will stay near record lows. Yuan forwards advanced on speculation China will let its currency appreciate. (Bloomberg)
  • Comment: We are not sure how Bloomberg characterizes high-yielding currencies, but Taiwan’s yield curve isn’t exactly showing it’s a “high yielder.” A comparison of the US curve and Taiwan are on the next page, along with a weekly chart of the Taiwan dollar. But needless to say, Taiwan’s currency is running on the Chinese growth dynamic.

    USDTWD – Taiwan dollar is cranking against the US dollar.

    Now take a look at Taiwan dollar paired against the euro (EURTWD) overlaid….

  • Europe’s economy unexpectedly stagnated in the fourth quarter as companies cut spending more than previously estimated. Gross domestic product in the 16-nation euro region remained unchanged compared with the third quarter, when it rose 0.4 percent, the European Union’s statistics office in Luxembourg said today. It had previously reported a fourth- quarter expansion of 0.1 percent. Corporate investment dropped 1.3 percent instead of 0.8 percent estimated earlier. (Bloomberg)
  • Comment: We keep thinking the Eurozone will underperform. The European Central Bank has been much stingier than the Fed (as seen in the European monetary aggregates). If you pile slow money growth on top of upcoming austerity measures needed to emerge from the fiscal crisis, it’s a bad growth recipe we think in a world where currencies are rated on relative growth. It’s a key reason we believe the euro goes lower from here.

    EURUSD (purple) versus Eurozone M-2 Year-over-year % change Seasonally Adjusted:

    If for some reason the euro were to follow the path of the monetary aggregates then the down it goes.

Quotable – On the silliness of Credit Default Swaps

“It is difficult to believe that those who buy CDS protection on the US Treasuries really imagine that the rate accurately reflects the probability of anything. They would have to believe not simply that the American government will default, but that when it does walk away from its liabilities, their counterparty will pay.”

                           John Kay