Non-Japan Asia (NJA) currencies have weakened in the past four weeks, led by sharp falls in the INR, THB and IDR (Figure 1). Rising oil prices and tepid exports are amongst the common factors behind this currency weakness. But precedent suggests that outside of periods of major financial shocks, these bouts of currency depreciation are reasonably shallow and short-lived and typically followed by similarly shallow and short-lived bouts of currency appreciation (Figure 2). It’s a similar picture for the CNY (Figure 3). This pattern of mean-reversion reflects in part the ebbs and flows of foreign FX flows and seasonality of current account flows. Importantly, it also reflects NJA central banks’ willingness and ability to smooth the path of their currencies via FX (and verbal) intervention. They have to balance the competitiveness of their currencies and large export sectors on the one hand with imported inflation and the cost of servicing foreign-currency denominated debt on the other.

1. Asian currencies still on the straight and narrow
Non-Japan Asia (NJA) currencies have weakened in the past four weeks, led by sharp falls in the
INR, THB and IDR (Figure 1). Rising oil prices and tepid exports are amongst the common factors
behind this currency weakness.
But precedent suggests that outside of periods of major financial shocks, these bouts of currency
depreciation are reasonably shallow and short-lived and typically followed by similarly shallow and
short-lived bouts of currency appreciation (Figure 2). It’s a similar picture for the CNY (Figure 3).
This pattern of mean-reversion reflects in part the ebbs and flows of foreign FX flows and
seasonality of current account flows. Importantly, it also reflects NJA central banks’ willingness
and ability to smooth the path of their currencies via FX (and verbal) intervention. Theyhave to
balance the competitiveness of their currencies and large export sectors on the one hand with
imported inflation and the cost of servicing foreign-currencydenominated debt on the other.
NJA exports and inflation have been soft in recent months, giving central banks both the incentive
and the room to allow a modicum of currency weakening. FX debt in NJA remains modest both by
historical and EM standards and is partly currency and earnings hedged but 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. Furthermore, central banks
of countries with historically volatile currencies – Indonesia for example – have come a long way in
fading FX peaks and troughs.
I would therefore expect NJAcentral banks to be biased towards stability in their currencies, or
even modest and slow appreciation, in coming weeks.
Figure 1: NJA currencies have weakened about 2% in the past month
Source: www.olivierdesbarres.co.uk,Investing.com
90
100
110
120
130
85
87
89
91
93
95
97
99
101
103
Apr10
Jul10
Oct10
Jan11
Apr11
Jul11
Oct11
Jan12
Apr12
Jul12
Oct12
Jan13
Apr13
Jul13
Oct13
Jan14
Apr14
Jul14
Oct14
Jan15
Apr15
GDP-weighted basket of NJA nominal effective exchange rates
(INR, IDR, KRW, MYR, PHP, SGD, TWD and THB), index
CNY (right scale)

2. Figure 2: But precedent suggests sell-offs (and
rallies) are reasonably modest and short-lived…
Figure 3: …including for the CNY
Source: www.olivierdesbarres.co.uk,Investing.com
Note: Includes INR, IDR, KRW,MYR,PHP, SGD, THB
and TWD
Source: www.olivierdesbarres.co.uk,Investing.com
Higher oil prices and soft exports removing some currency support
I estimate that a GDP-weighted basket of NJA nominal effective exchange rates (NEERs) has weakened
about 2% since mid-April, and if the CNY is excluded is back near early 2015 levels (see Figure 1). While
country-specific drivers have contributed to individual currencies’ weakening, a number of common factors
can be identified, including:
- Rising crude oil prices: The 28% increase in international crude oil prices since mid-March and
subsequent increase in the value of oil imports. The nature of crude-oil contracts suggests this price
increase is likely to feed through to the USD-value of imports over coming months. As I elaborated
in Crude Expectations (16 January 2015), NJA economies have significant net oil imports. The only
exception is Malaysia which is a small net crude oil exporter.
- Weak exports: The USD-value of exports from Asia (excluding China), seasonally adjusted, were
down 8% year-on-year in March, according to my estimates, and this was not a one-off. Indeed, in
Q1 2015, exports contracted 8% from Q1 2014 and 20% annualised from Q4 2014 (see Figure 4).
The picture is similar in China (see Figure 5).
Furthermore, Korea and Taiwan have released April data showing the USD-value of exports at
multi-year lows, according to my calculations (see Figure 6). The US dollar’s appreciation accounts
for only part of the weakness in the USD-value of Asian exports. Figure 7 strips out these currency
effects and is effectively an estimate of export volumes, which have flat-lined for the past 18
months.
-5
-4
-3
-2
-1
0
1
2
3
4
5
Apr 10 Feb 11 Dec 11 Oct 12 Aug 13 Jun 14 Apr 15
Month-on-month % change in
GDP-weighted basket of NJA nominal
effective exchange rates
-4
-3
-2
-1
0
1
2
3
4
5
Apr 10 Feb 11 Dec 11 Oct 12 Aug 13 Jun 14 Apr 15
Month-on-month % change in CNY
nominal effective exchange rate

3. Figure 4: Exports slumped in Q1 2015… Figure 5: …including in China…
Source: National statisticaloffices,
www.olivierdesbarres.co.uk
Note: includes India, Indonesia, Korea, Malaysia,
Philippines, Singapore, Taiwan and Thailand
Source: China customs, www.olivierdesbarres.co.uk
Figure 6: …and were weak in Korea and Taiwan
in April
Figure 7: Export volumes have flat-lined for 18
months
Source: National statisticaloffices,
www.olivierdesbarres.co.uk
Source: National statisticaloffices,
www.olivierdesbarres.co.uk
Note: the USD-value of exports is deflated by a GDP-
weighted basket of NJA exchange rates vs the US
dollar (includes INR, IDR, KRW, MYR,PHP, SGD, THB
and TWD)
Incentives for central banks to fade or even reverse currency moves
450
490
530
570
610
Mar-10
Aug-10
Jan-11
Jun-11
Nov-11
Apr-12
Sep-12
Feb-13
Jul-13
Dec-13
May-14
Oct-14
Mar-15
NJA merchandise exports (excluding China)
seasonally adjusted 3-month moving average ($ bn)
350
400
450
500
550
600
650
Mar-10
Aug-10
Jan-11
Jun-11
Nov-11
Apr-12
Sep-12
Feb-13
Jul-13
Dec-13
May-14
Oct-14
Mar-15
China merchandise exports
seasonally adjusted 3m moving average ($ bn)
30
50
70
90
110
130
150
Jan-09
Jul-09
Jan-10
Jul-10
Jan-11
Jul-11
Jan-12
Jul-12
Jan-13
Jul-13
Jan-14
Jul-14
Jan-15
Korea
Taiwan
Merchandise exports
seasonally adjusted 3m moving average ($ bn)
2.0
2.2
2.4
2.6
2.8
3.0
3.2
3.4
3.6
3.8
4.0
Jan-09
Jul-09
Jan-10
Jul-10
Jan-11
Jul-11
Jan-12
Jul-12
Jan-13
Jul-13
Jan-14
Jul-14
Jan-15
NJA merchandise exports (excluding China),
adjusted for seasonality and currency moves
(index) *

4. Precedent suggests that outside of periods of major financial shocks (e.g. 2008-2009), these bouts of
currency depreciation are reasonably shallow and short-lived and typically followed by similarly shallow and
short-lived bouts of currency appreciation (Figure 2). It’s a similar picture for the CNY (Figure 3).
This pattern of mean-reversion reflects in part the ebbs and flows of foreign FX flows and seasonality of
current account flows – for example the rise in worker remittances to the Philippines in the run-up to
Christmas.
Importantly, it also reflects NJA central banks’ willingness and ability to smooth the path of their currencies
via intervention in the FX market and/or verbal intervention. They have to balance the competitiveness of
their currencies and large export sectors on the one hand with imported inflation and the cost of servicing
foreign-currency denominated debt on the other.
NJA exports have weakened in recent months, as detailed above, giving central banks the incentive to
allow a modicum of currency weakening and support export competitiveness. Importantly, inflation has also
weakened to multi-year lows (see Figure 8) which has given NJA central banks the room to maintain loose
monetary conditions – i.e. low interest rates and weaker currencies.
Figure 8: NJA-inflation has fallen to multi-year
lows
Figure 9: Volatility in IDR NEER has eroded
significantly in the past 18 months
Source: National statisticaloffices,
www.olivierdesbarres.co.uk
Note: Wholesale Price Inflation for India
Source: www.olivierdesbarres.co.uk,Investing.com
FX debt in NJA remains modest both by historical and EM standards and is partly currency and earnings
hedged but 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.
Furthermore, central banks of countries with historically volatile currencies – Indonesia for example – have
come a long way in successfully fading FX peaks and troughs (see Figure 9).
I would therefore expect NJA central banks to be biased towards stability in their currencies, or even
modest and slow appreciation, in coming weeks. Underlying flows are unlikely to support rapid or
sustained. Modest global growth and demand is likely to curb Asian exports while the uncertainty about the
timing of Fed rate hikes may dampen FX inflows into Asia.
0
1
2
3
4
5
6
7
8
9
Including China
Excluding China
GDP-weighted CPI-inflation, % year-on-year*
-10
-8
-6
-4
-2
0
2
4
6
8
10 Apr10
Sep10
Feb11
Jul11
Dec11
May12
Oct12
Mar13
Aug13
Jan14
Jun14
Nov14
Apr15
Month-on-month % change in IDR nominal
effective exchange rate