Non-Japan Asian (NJA) currencies have appreciated versus the US dollar and currencies of their main trading partners in October. But the historical pattern of monthly appreciation/depreciation suggests that this Asian currency rally may start losing steam in coming weeks, with currencies eventually weakening modestly versus the US dollar.

1. History points to Asian FX rally fizzling out
Non-Japan Asian (NJA) currencies have appreciated versus the US dollar and currencies of their
main trading partners in October. But the historical pattern of monthly appreciation/depreciation
suggests that this Asian currency rally may start losing steam in coming weeks, with currencies
eventuallyweakening modestly versus the US dollar.
This historical pattern is partly due to the seasonality of current account flows, the ebb and flows of
capital attracted/repelled byvaluations and central banks’ management of their currencies. I see
few reasons why it will be materially different this time round.
Inflows into Asia are unlikely to accelerate given lingering foreign investors’ concerns about
regional and global economic growth, the start of the US Fed hiking cycle and country-specific
vulnerabilities including sensitivity to commodity prices and elevated foreign debt.
Furthermore, while Asian central banks may not purposefully weaken their currencies, they may
have the room and incentive to lean against further appreciation: overall, Asia inflation is low and
falling, exports are weak and FX reserves have fallen in the past six months.
EM currencies and equity markets have strengthened in the past month, following months of weakening.
Specifically, Non-Japan Asian (NJA) currencies have appreciated versus the US dollar (see Figure 1) and
the currencies of their main trading partners, bar the marginally weaker and Philippines peso (see Figure
2).
Figure 1: Modest Asian currency rebound in
October
Figure 2: Asian currencies, bar PHP, have
appreciated in NEER terms
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100
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108
Apr 12 May 13 Jun 14 Jul 15
Including China (left scale)
Excluding China
GDP-weighted Asia currency basket vs USD
(index, 23 April 2010 = 100)
-20
-16
-12
-8
-4
0
4
8
12
16
past 1 month
past 12 months
% change in nominal effective exchange rate

2. Source: investing.com; www.olivierdesbarres.co.uk
Note: Includes India, Indonesia, Korea, Malaysia,
Philippines, Singapore, Taiwan and Thailand
Source: investing.com; www.olivierdesbarres.co.uk
Note: Asia baskets are GDP-weighted
The drivers for this rally likely include:
i) Faster-than-expected GDP growth in Q3 in China and Korea;
ii) A delay to the US Federal Reserve hiking cycle;
iii) Signs that the European Central Bank is willing to beef up its existing quantitative easing and
potentially cut its deposit rate;
iv) The Indian and Chinese central banks’ willingness to cut policy rates in order to support economic
growth alongside FX intervention to support their currencies; and
v) Foreign inflows into Asia attracted by cheap valuations.
While forecasting the path of each of these variables is fraught with difficulty, history suggests that the rally
in Asian currencies may start losing steam in coming weeks.
Indeed Figure 3 shows that in the past five years NJA currencies (excluding CNY) have rarely appreciated
or depreciated vs the USD by more than about 3% month-on-month. I estimate that this GDP-weighted
basket of Asian currencies has appreciated by about 3.3% month-on-month in the past week. Based on
precedent, I would expect that pace of appreciation to slow to around zero percent in the next few weeks,
before turning to depreciation (red line in Figure 3).
Figure 3: Regular pattern of appreciation/depreciation of Asian currencies versus the USD dollar
Source: investing.com; www.olivierdesbarres.co.uk
Note: Includes India, Indonesia, Korea, Malaysia,Philippines, Singapore, Taiwan and Thailand
-8
-6
-4
-2
0
2
4
6
May 10 Jan 11 Sep 11 May 12 Jan 13 Sep 13 May 14 Jan 15 Sep 15
Asia (exc CNY) GDP-weighted basket vs USD, month-on-month % change

3. Of course this does not imply that Asian currencies will actually weaken versus the USD near-term, merely
that the pace of appreciation will slow. Indeed, based on the above forecast for the pace of
appreciation/depreciation, Asian currencies should appreciate modestly versus the US dollar in the next
couple of weeks before depreciating slowly (see Figure 4).
Figure 4: Based on precedent, Asian currencies
may appreciate further vs USD before weakening
Figure 5: The pace of monthly change in Asian
NEERs also tends to be confined
Source: investing.com; www.olivierdesbarres.co.uk
Note: Includes India, Indonesia, Korea, Malaysia,
Philippines, Singapore, Taiwan and Thailand
Source: investing.com; www.olivierdesbarres.co.uk
Note: Includes India, Indonesia, Korea, Malaysia,
Philippines, Singapore, Taiwan and Thailand
Notably, the historical pattern for the Chinese renminbi is not altogether different although the quasi-peg got
the USD dollar for periods of time has resulted in far less volatility, with the monthly pace of appreciation
and deprecation rarely exceeding 1% (see Figure 6). The one notable exception of course was the
renminbi’s devaluation in August which resulted in a pace of monthly depreciation exceeding 3%.
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100
Apr 13 Nov 13 Jun 14 Jan 15 Aug 15
Asia (exc CNY) GDP-weighted
basket vs USD, index
-5
-4
-3
-2
-1
0
1
2
3
4
5
Apr 13 Oct 13 Apr 14 Oct 14 Apr 15 Oct 15
Month-on-month % change in a
GDP-weighted basket of NJA (exc CNY)
nominal effective exchange rates

4. Figure 6: Pace of monthly CNY appreciation/depreciation confined, with notable exceptions
Source: investing.com; www.olivierdesbarres.co.uk
Moreover this pattern is similar if Asian currencies are measured against their main trading
partners’ currencies (including the euro, sterling, yen etc…). Indeed, Asian currencies’ nominal effective
exchange rates (NEERs) tend to appreciate and depreciate at a pace confined to reasonably narrow
bands, with the more volatile currencies (IDR, MYR) trending in wider bands.
There are a number of explanations for these patterns, including the seasonality of current account flows,
the ebb and flows of capital attracted/repelled by valuations and central banks’ management of their
currencies.
I see few reasons why it will be materially different this time round. For starters, inflows into Asia are
unlikely to accelerate given lingering foreign investors’ concerns about regional and global economic
growth, the start of the US Fed hiking cycle and country-specific vulnerabilities including sensitivity to
commodity prices and elevated foreign debt.
Furthermore, while Asian central banks may not purposefully weaken their currencies, they may have the
room and the incentive to lean against further appreciation: overall, inflation is low and falling, exports are
weak and FX reserves have fallen (see Figure 7).
 Malaysia and Indonesia may have a compelling need to lean against currency appreciation, but
less room to do so given still high CPI-inflation.
 India has recorded weak exports while WPI-inflation remains firmly in negative territory (although
the increasingly used CPI-inflation measure paints a somewhat more balanced picture). The central
bank’s FX reserves were up about 16% year-on-year in September but they remain modest relative
to imports.
 Singapore’s exports have also shrunk while inflation remains well below the medium-term average,
which may provide both the incentive and the room to fade the pace of SGD appreciation.
-4
-3
-2
-1
0
1
2
May 10 Jan 11 Sep 11 May 12 Jan 13 Sep 13 May 14 Jan 15 Sep 15
CNY vs USD, month-on-month % change

5.  The case for the Philippines to slow, let alone reverse currency appreciation is perhaps a little less
compelling as exports have held up reasonably well, inflation is still in positive territory and the
BSP’s central bank FX reserves are up versus a year ago.
Figure 7: Central banks have incentive, and possibly room, to slow any currency appreciation
Source: Statistics Offices, central banks, IMF, investing.com, www.olivierdesbarres.co.uk
Notes: 1. WPI-inflation; 2. Export data for June-August 2015; 3. Non-oil domestic exports
1. Signs of deflation provide room to fade currency appreciation
The fall in CPI-inflation in NJA weakens the case for a stronger currency’s disinflationary drag (see Figure
8). As I argued in More EM central banks to join rate-cutting party (30 September), in countries where real
policy rates remain historically high, there is scope for further monetary easing in the form of policy rate
cuts and central banks leaning against sustained and/or rapid currency appreciation.
However, Figure 9 shows that in Indonesia and particularly Malaysia CPI-inflation in Q3 was at the high end
of a three-year range while in China it was near the middle of the range. For Malaysia, and to a lesser
extent Indonesia and China, the central bank’s scope to slow let alone reverse currency appreciation may
thus be somewhat more limited.
Year-on-year
% change
Quarter-on-quarter
seasonally adjusted
annualised % change
Year-on-year % change
in estimated FX-
adjusted USD-value
Months of
merchandise
imports
in Q3 2015 June '12 - '15
average
China -5.9 -8.2 -5.1 24.2 1.7 2.1
India 1
-18.7 -13.4 16.0 10.8 -4.5 4.4
Indonesia -16.4 -33.8 -4.0 8.8 7.1 6.3
Korea -8.8 -10.5 5.5 10.7 0.7 1.3
Malaysia 2
-13.8 -8.3 -20.6 6.8 3.0 2.2
Philippines 2
-3.8 15.9 5.5 13.2 0.6 3.3
Singapore 3
-12.6 -32.3 -1.3 10.3 -0.6 1.8
Taiwan -14.4 -19.9 6.2 24.7 -0.3 1.0
Thailand -5.3 -17.4 0.8 9.7 -1.1 1.8
Merchandise exports, Q3 2015 CPI-inflation, % year-on-yearCentral bank FX Reserves (Sept 2015)

6. Figure 8: Disinflationary drag of stronger currency
not required…
Figure 9: …with perhaps exception of Indonesia
and Malaysia where inflation sticky
Source: Statistics Offices, central banks,
www.olivierdesbarres.co.uk
Note: Includes India, Indonesia, Korea, Malaysia,
Philippines, Singapore, Taiwan and Thailand; WPI-
inflation for India
Source: Statistics Offices, central banks,
www.olivierdesbarres.co.uk
Note: Asia baskets are GDP-weighted
2. Weak Asian exports are incentive to protect currencycompetitiveness
The US dollar value of NJA exports was down 9% from a year ago in September (see Figures 10 & 11),
with the modest rebound mainly driven by a bounce in Korean exports. While domestic consumption and
services are faring better (in China and Korea for example), policy-makers may want to protect the
competitiveness of export sectors which are major contributors to growth and importantly employment.
-1
0
1
2
3
4
5
6
7
Jan-11 Mar-12 May-13 Jul-14 Sep-15
Including China
Excluding China
GDP-weighted CPI-inflation
% year-on-year*
-6
-4
-2
0
2
4
6
8
10
China
Indonesia
India(WPI)
Korea
Malaysia
Philippines
Singapore
Taiwan
Thailand
AsiaincChina
AsiaexcChina
Q3 2015
Headline CPI-inflation, % year-on-year
June 2012 - June 2015 range

7. Figure 10: Asian exports rebounded modestly in
September from a low base.
Figure 11: Asian exports were down 9% yoy in Q3
Source: Statistics Offices, central banks,
www.olivierdesbarres.co.uk
Note: GDP-weighted, includes India, Indonesia, Korea,
Malaysia,Philippines, Singapore, Taiwan and Thailand
Source: Statistics Offices, central banks,
www.olivierdesbarres.co.uk,
3. Modest currency intervention could replenish FX reserves
Adjusted for currency valuation effects, namely the depreciation of the euro, yen, sterling and Australian
and Canadian dollars versus the US dollar, the USD-value of Asian central bank FX reserves has fallen in
the past six months (see Figure 12).
Specifically, in the past year, FX reserves have fallen in Malaysia and Indonesia (depressed commodity
prices), less so in China (capital account outflows), as depicted in Figure 13. These countries’ central banks
may want to use the current bout of currency strength to replenish their FX reserves. FX reserves have
been broadly flat in Singapore and Thailand and actually increased in Philippines, Korea, Taiwan and India.
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Mar-10 Dec-11 Sep-13 Jun-15
Including China
Exluding China (right scale)
NJA monthly merchandise exports
seasonally adjusted ($ bn)
-40
-30
-20
-10
0
10
20
year-on-year % change
3m/3m annualised, %
Merchandise exports in Q3 ($-terms)

8. Figure 12 : FX outflows have lowered Asian central
bank reserves in the past six months
Figure 13 : Asia central bank FX reserves – a
differentiated picture
Source: IMF, www.olivierdesbarres.co.uk
Note : Includes India, Indonesia, Korea,Malaysia,
Philippines, Singapore, Taiwan and Thailand
Source: IMF, www.olivierdesbarres.co.uk
150
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225
250
275
300
Dec-10 Mar-12 Jun-13 Sep-14
Including China (left scale)
Excluding China
Asia central bank FX reserves adjusted for FX
valuation effects (index, Jan 07 = 100)
-25
-20
-15
-10
-5
0
5
10
15
20
Year-on-year % change in FX-adjusted USD-value
of central bank FX reserves in September 2015