Non-Japan Asia currencies, led by led by the CNY, IDR and THB, have staged a mini comeback in the past ten days. This is broadly in line with my expectations that precedent suggested that NJA currencies would stabilise and possibly appreciate gradually after a month of relative weakness. NJA central banks are seemingly comfortable with this modest currency rebound…for now.

1. Asian currencies’ mini comeback – fizzle, not fireworks
Non-Japan Asian currencies up in past ten days, led by CNY, IDR and THB
Non-Japan Asian (NJA) currencies have staged a mini comeback since mid-May, in line with my
expectations that precedent suggested that NJA currencies would stabilise and possibly appreciate
gradually after a month of relative weakness (see Asian currencies still on the straight and narrow, 15 May
2015). A GDP-weighted basket of NJA nominal effective exchange rates (NEERs), excluding the CNY, has
appreciated about 0.7% since 15 May, according to my estimates (see Figure 1). This reverses over a third
of the depreciation recorded in the previous month.
Figure 1: Non-Japan Asian currencies have staged mini comeback
Source: www.olivierdesbarres.co.uk,Investing.com; Note: * GDP weighted basket, NEERs are derived from BIS FX
weights
The pattern is even more obvious if the Chinese yuan is included, with the CNY NEER appreciating about
2.3% since mid-May, more than reversing the 1.8% depreciation recorded between 14 April and 14 May.
Over the past year, the CNY NEER has appreciated about 14.5%, by far the fastest pace of annual
appreciation in Asia (see Figure 2). It is thus perhaps unsurprising that the IMF acknowledged yesterday
"that the substantial real effective appreciation over the past year has brought the [yuan] exchange rate to a
level that is no longer undervalued”. This is in contrast to the US Treasury’s April report to Congress which
describes the yuan real exchange rate as still “significantly undervalued”.
-5
-4
-3
-2
-1
0
1
2
3
SGD KRW MYR Asia exc
CNY*
TWD INR PHP THB IDR Asia inc
CNY*
CNY
14 April-14 May
Since 15 May
% change in Asian nominal effective exchange rates

2. Figure 2: CNY NEER up 14.5% in past year, but IMF and US Treasury disagree on whether yuan undervalued
Source: www.olivierdesbarres.co.uk,Investing.com; Note: * GDP weighted basket, NEERs are derived from BIS FX
weights
NJA central banks seemingly comfortable with this modest currency rebound…for now
All NJA currencies bar the Singapore Dollar and Korean Won have appreciated versus their trading
partners’ currencies in the past ten days. This can in part be attributed to the market’s more sanguine view
of an imminent start to the Fed rate hiking cycle and a slight dip in oil prices. Interestingly, this rebound in
NJA currencies is not uncharacteristic, as Figure 3 shows. Bar rare financial shocks and acute sell-
offs/rallies, NJA currencies in recent years have tended to appreciate modestly for short periods of time,
before giving back some or all of their gains and vice-versa.
Importantly, there are few signs that NJA central banks are standing in the way of this recent modest
currency rebound. The increase in FX-denominated corporate debt and servicing costs, notably in China,
does provide policy-makers with an argument in favour of a stable or mildly appreciating local currency.
More generally, still high levels of private sector leverage in countries such as Korea are curbing policy-
makers’ appetite to further loosen monetary policy. Furthermore, central banks of countries with historically
volatile currencies – Indonesia for example – have come a long way in successfully fading FX peaks and
troughs.
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-2
0
2
4
6
8
10
12
14
16
IDR MYR SGD TWD INR Asia exc
CNY*
KRW THB PHP Asia inc
CNY*
CNY
% change in Asian nominal effective exchange rates in past 12 months

3. But I maintain my view that higher yields in the west and tepid capital inflows into NJA – as the market
digests the implications of stronger than expected US core inflation and durable goods orders data for April
– and soft NJA exports are likely to cap the magnitude of this currency rebound. Moreover, with Asian
inflation at record lows, central bank officials have a decent incentive to put a break on any prolonged
and/or rapid currency appreciation. This may not present FX market participants with many exciting
directional trading opportunities at present but it is a modus operandi which has worked for NJA policy-
makers in the past and I see few reasons for them to deviate from script.
Figure 3: NJA currencies once again showing signs of mean reversion
Source: www.olivierdesbarres.co.uk,Investing.com
Yen bucking the trend, Bank of Japan hands-off for now
The yen NEER has weakened about 11% and 30% in the past one and three years, respectively, and thus
Japanese exports have become far more competitive, as reflected in buoyant export growth and corporate
profitability. This competitiveness gain is even more marked against Japan’s biggest competitors, including
South Korea (see Figure 4).
So whether we a weaker yen is a direct objective of quantitative easing or merely a helpful by-product, the
Bank of Japan’s QE has successfully contributed to a weaker and more competitive yen. At the same time
a number of BoJ board members have welcomed a weak but stable currency. The door is still open to a
further round of BoJ monetary policy easing later this year if growth does not pick up and jeopardises the
central bank’s medium-term inflation target of 2% and if competitor currencies exhibit a trend of sustained
weakening. However, there is yet no sense of urgency within a BoJ seemingly preferring to wait-and-hold.
-5
-4
-3
-2
-1
0
1
2
3
4
Apr 10 Oct 10 Apr 11 Oct 11 Apr 12 Oct 12 Apr 13 Oct 13 Apr 14 Oct 14 Apr 15
Excluding CNY Including CNY
Month-on-month % change in GDP-weighted basket of Asian nominal effective exchange rates
(10-day moving average)

4. Figure 4: Japanese yen’s competitiveness gain is hard to ignore
Source: www.olivierdesbarres.co.uk,Investing.com; Note: NEERs are derived from BIS FX weights
70
80
90
100
110
120
130
Apr 10 Feb 11 Dec 11 Oct 12 Aug 13 Jun 14 Apr 15
JPY CNY KRW
Nominal effective exchange rates (23 April 2010 = 100)