The USD was firmer against Asia ex Japan (AXJ) currencies despite the modest retreat in the DXY (USD) index yesterday. Equities in the emerging markets continued to weaken but not in the advanced economies. This reflected that IMF's latest assessment that downside risks have increased for the global economy, particularly for emerging market economies vis-à-vis the advanced economies. Adding to worries here was the fall in the Australian dollar below the psychological 0.70 mark last Friday. About 70% of Australia's exports headed to Southeast Asia, China, Japan and South Korea last year.
Within AXJ, the Southeast Asian currencies led the depreciation on Monday. The Malaysian ringgit was the worst performer, down 1.7% against the USD on the day, followed by the Thai baht (-0.7%) and the Indonesian rupiah (-0.6%). The Chinese yuan fell 0.2% even though the central parity was fixed stronger by 0.1%. Despite the assurance by China to stabilize its markets, the Shanghai Composite Index fell 2.5% on Monday. Also depreciating by 0.2% were the Korean won, Singapore dollar, Taiwan dollar and the Philippine peso. With the US unemployment rate at 5.1% in Aug15, the odds of a surprise Fed rate lift-off at next week's FOMC meeting on 17 Sep could not be totally discounted. The region will also be watching out a weaker CNY fixing today.
Currency pegs have also come under stress after the unanticipated Chinese yuan devaluation on 11 Aug. The Kazakhstan tenge depreciated sharply by more than 20% after it abandoned, on 20 Aug, its peg and became a freely floating currency. With oil prices seen staying low, speculation emerged that the Saudi Riyal may be next to abandon its peg to the USD.
In Asia, the Hong Kong Monetary Authority also intervened to support the lower floor of the 7.75-7.85 convertibility band for USD/HKD. The CNY devaluation was viewed the first concrete step to making the CNY more convertible on the capital account. In turn, this revived speculation that HK may eventually shift its HKD peg from the USD to the CNY. The central banks of Saudi Arabia and Hong Kong have reaffirmed their commitment to their pegged exchange rate region which they believed have served them well in the past decades.
