US Labeling of China as “Currency Manipulator” Sends Regional Currencies Reeling (Current Issue No.3034)

           The trade war between the US and China has spread to a battle over currencies. Previously, their conflicts were limited to tariffs and international trade. Recently, the US Treasury Department accused China of “manipulating its currency", representing a more aggressive move after China let the Yuan slide past CNY7/USD.

           KResearch has assessed that a likelihood that the Yuan will weaken further over the near term may pressure other regional currencies to follow suit. The depreciation of each regional currency will hinge on many factors: 1) Dependency on China as an export market; 2) High share of commodity exports, which will make the currency more fragile if the Chinese economy slowdowns further and the US-China trade dispute persists; and, 3) Weak economic fundamentals, namely currency account deficit and/or low international reserves. It can be said that the Rupiah and Ringgit are relatively vulnerable to such factors.

          Looking ahead, KResearch views that a protracted trade war between the US and China may cause the Yuan to soften ahead and this may affect other regional currencies. In the worst- case scenario, Asian countries that are heavily dependent on China as a major export market and have fragile fundamentals, in particular Indonesia and Malaysia, may see their currencies being pressured further by capital outflows.   

          ​ Regarding Thailand, such a risk to the Thai Baht may be limited because of Thailand's sound economic fundamentals, surplus current account and relatively high international reserves. Nevertheless, the Thai export sector may lose its competitiveness if the Thai Baht does not weaken in line with other regional currencies, in particular the Rupiah, Ringgit and/or Dong, in certain periods.