Asian currencies caught between weaker CNY and higher US rates

The central parity for USD/CNY was lifted, for the fourth straight session, by 96 bps to 6.4236 yesterday. Altogether, the central parity has been increased by a total 385 bps from 6.3851 from last Friday. According to the State Administration of Foreign Exchange (SAFE), the market needs to view the CNY's long-term valuation not just against the USD, but also against a basket of currencies. 

With the CNY now part of the International Monetary Fund's (IMF) Special Drawing Rights (SDR), it is not inconsistent for a more market-determined USD/ CNY rate to rise when the USD appreciates against the currencies of its major trading partners. As the CNY becomes more integrated with the global financial system, a weaker CNY vs USD is also in line with the monetary divergence that has kept the USD strong against the EUR and JPY. After all, China is still lowering rates at a time when the Fed is widely expected to lift US rates next week. 

On average, returned 97% of the appreciation they chalked after the 2008 global financial crisis. Except for three currencies (SGD, PHP and MYR), all have lowered interest rates this year. Singapore has no interest rate policy, and has instead, flattened the appreciation pace of its SGD policy band twice this year. Except for the KRW, the CNY has returned the least gains. With Korea now concerned that Chinese companies may be closing the gap with its corporates, the KRW is likely to closely monitor the CNY's movements. 

Notably, the IDR, INR and MYR, not only gave back all their appreciation, they also depreciated more. These currencies have high external debt relative to their foreign reserves which render them vulnerable to higher US rates and a higher USD. In particular, the sovereign credit default spreads for IDR and MYR have been rising with the 3M USD Libor this year. Yesterday, USD/IDR broke above its 100-day moving average, the resistance that has capped its upside after its downward correction in early October. While Asian currencies are generally prepared for the US rate lift-off next week, they are unlikely to welcome more CNY depreciation at the same time.