Appreciation of ASEAN Currencies Against the US Dollar

The recent appreciation of ASEAN currencies against the US dollar has sparked interest among investors and market analysts. While this rally may indicate economic strength, a deeper analysis suggests a more nuanced situation.

Factors Driving Currency Appreciation

BCA Research examines the factors driving this currency appreciation, including economic fundamentals, global trends, and country-specific conditions. The focus is on the Malaysian ringgit, Thai baht, Philippine peso, and Indonesian rupiah.

ASEAN currencies have recently strengthened against the US dollar. However, analysts at BCA Research believe this appreciation is temporary. They argue that the underlying economic conditions, such as declining global exports and a potential shift towards riskier investments, favor the US dollar and may lead to a weakening of ASEAN currencies.

Global Economic Influences

ASEAN currencies are heavily influenced by global economic conditions, particularly the manufacturing and trade cycles. A critical factor is the decline in global manufacturing orders, which has historically signaled a downturn in ASEAN currencies.

While recent improvements in exports have provided some support, the global economy is expected to experience a slowdown due to weaker domestic demand in the United States.

This economic downturn may lead to a period of risk aversion, where the US dollar appreciates and emerging market currencies, such as those in ASEAN, decline in value.

Individual Currency Analysis

A closer look at the individual ASEAN currencies reveals varying degrees of vulnerability and resilience, influenced by both global and domestic factors.

Malaysian Ringgit: Malaysia’s ringgit has recently strengthened, but this uptrend is likely to be temporary. The country’s trade surplus has shrunk, and its current account surplus is also decreasing. As US demand for goods slows down, Malaysia’s trade and current account balances are expected to weaken further, putting downward pressure on the ringgit.

Thai Baht: Similarly, the Thai baht’s recent rally is expected to be temporary. Thailand’s trade balance has slipped into deficit, and its current account balance has barely remained positive. The collapse in export orders signals further weakening, likely leading to a depreciation of the baht.

Philippine Peso: Despite recent gains, the Philippine peso is expected to continue falling. The country’s increasing reliance on foreign debt to finance its trade deficit is concerning. As the gap between Philippine bond yields and US Treasury yields narrows, the peso could depreciate.

Indonesian Rupiah: The Indonesian rupiah is also expected to weaken. Indonesia’s current account remains in deficit, and sluggish manufacturing and commodity exports pose challenges. Given its dependence on exports to China, growth outlook vulnerabilities will likely lead to further depreciation of the rupiah.

Investment Recommendations

BCA Research warns investors against chasing the recent rally in ASEAN currencies. While the Malaysian ringgit and Thai baht may outperform other emerging market currencies during a potential global market downturn, the Philippine peso and Indonesian rupiah are expected to struggle due to weaker economies and reliance on borrowing.

BCA Research suggests that investors maintain a short position on the peso and rupiah compared to the US dollar. They expect the ringgit and baht to outperform other emerging market currencies over the next six to nine months. However, the rupiah and peso are expected to continue to depreciate.