Home / Analysis / Aussie the odd-man out in Asian currency outlook

(pictured: Louis Kuijs)

The currency investment decision for super funds is the biggest and, arguably, most difficult they have to make. The Australian dollar has had the largest depreciation of any Asia Pacific currency since mid-2014, benefitting most big funds. In a new study, Oxford Economics predicts the future for Asian currencies.

According to the paper by Oxford Economics – ‘The Short, Medium and Long-Term Outlook for Asian FX’ –  Australia looks likely to remain the odd man out in Asia region currencies, although a rise in the Aussie versus the US dollar is expected longer term.

Of the 12 Asian countries studied by the global advisory firm, Australia has the worst current account outlook. But the strong current account balances of most Asian countries has not had much impact on their currencies, even in the longer term.

The research paper, by economist Louis Kuijs, predicts Australia will have the least further depreciation of its currency between now and the middle of next year, but will lag China and some others in an expected appreciation trend between the middle of 2017 and 2019. Kuijs is the head of Asia economics for Oxford Economics.

The report notes that Asian currencies have generally depreciated about 10-15 per cent against the greenback between July 2014 and January 2016. The biggest depreciation was for Australia, down 23.9 per cent, and the smallest was Vietnam, down 2.9 per cent, out of the 12 Asian countries compared. The Chinese RMB (yuan) depreciated 6.1 per cent.

Oxford Economics expects them to weaken further through to mid-2017 because of US Federal Reserve interest rate increases.

“But after that, in the medium term, we forecast most Asian currencies to appreciate versus the US$ as improving economic growth attracts equity flows while, in the background, productivity-based trend appreciation of the real exchange rate (RER) takes place…” the report says.

“In broad terms, we expect Asian RERs to continue to appreciate in the long term as long as catch-up trends persist, which we generally expect to be the case. The room for further increases in prices, relative to those in the US, is largest in India, but it is contingent on India continuing to outgrow the US by a significant margin.

“In China, room also remains for trend RER appreciation against the US$ – indeed that is the driver of our medium-term outlook for the [RMB]. But … in spite of the recent depreciation, it is not cheap in a regional context…

“Even though the RERs of Hong Kong and Singapore have in the last ten years seen remarkably modest appreciations, we expect them to rise in the longer term. The channels may play out in different ways, and politics will be as important as economics, but key is that in both economies we expect wage earners to benefit more from overall economic growth than they have done in recent decades.”