There was something of a military tinge to comments made last week by Peter Redward, head of emerging Asia research at Barclays Capital in Singapore. He could be forgiven for that, though, as he was speaking about turbulence on the Korean peninsula and the recent global ‘currency wars’.
Following much-discussed efforts by various countries in recent months to weaken their currencies against the dollar, a period of calm has now settled as regards the greenback and Asian currencies, says Redward.
That’s largely because the turbulence in Europe has brought a very substantial adjustment in foreign exchange positioning in this region, he argues. “A lot of positions have been closed out, as exporters have been stepping back from selling dollars.”
However, this situation is unlikely to last, says Redward. Barclays economists in the US estimate that the US needs close to $900 billion in 2011 from international capital markets to fund its current-account and FDI deficits.
The lion’s share of such funding in the past few years has come from central banks and sovereign wealth funds seeking to protect their own assets, he says. “Our sense is that this is what’s going to drive the next wave of dollar weakening against pretty much everything,” he says, suggesting the broad dollar index could fall by as much as 5% in 2011.
“The dollar is under a sustained amount of pressure, and as concerns in Europe dissipate and US interest rates stabilise, we’ll start to see the dollar sliding again,” says Redward. “That means the political tensions are going to start emerging again, and we’ll see currency wars part two, for sure.”
As for Asian currencies, he sees them appreciating across the board, led most likely by an increase of some 10% in the Korean won, while the renminbi should see a rise of around 5% and the Singapore dollar and Thai baht both strengthening by around 3%-4%.
On the rates side, it’s much more complicated, says Redward. We’re expecting central banks to push up interest rates gradually.
“Front-end interest rates are rising right now, but generally, for the first time in a couple of years, it hasn’t paid to be received in the front end.” He’s referring to the fact that since the interest rate curve has been relatively steep at the front end for most Asian countries, it’s been advantageous to buy short-dated bonds or receive front-end swaps.
However, rate hike expectations are now priced in and even underpriced in one or two markets, such as Malaysia, argues Redward. As a result, Asian bond markets, which have seen huge inflows from foreigners this year, will receive much smaller inflows next year. In fact, he says, Asian bond markets will probably see a net sell-off next year, although not aggressively. “A lot of that again is priced into the forward curves in the swap markets,” he adds.
“2011 will be a tricky year for investors,” says Redward. “There are no clear macro themes.”
Another issue underlining his point is the potential for another round of turbulence in Korea. “It’s our view that North Korea will rattle the South’s cage again, it’s just a question of when,” says Redward.
“Most of the time people look at these bouts of turbulence and say ‘it’s North Korea, like it or not’,” he adds. “But the dramatic escalation this year, coupled with the fact that South Korea’s new defence minister has come out very hawkish, says to us that people even in Seoul are much more nervous this time.”
Redward cites in support of his point the fact that whereas such events in Korea usually lead to foreigners selling and Koreans buying, when the shelling took place last month it was the locals selling assets and foreigners making the purchases.
“Our concern is that another event will lead people to reassess the risk prospects of Korea, and that would affect the valuation of stocks, the currency and also the credit [market],” he says.
Peter Redward is scheduled to speak at AsianInvestor's RMB Rising seminar on January 25 in Singapore.