Added: 02/14/2006 |
Trading asian currencies - Effective exchange rate orientationForeign exchange turnover in Asian currencies grew faster than the global total between 2001 and 2004. Renminbi trading rose particularly strongly. Evolving expectations about the renminbi seem to be joining the dollar/yen spot rate in exerting an influence on Asian foreign exchange markets. Asian currencies with more flexible exchange rates appear to be trading with an effective exchange rate orientation.
Trading Asian currencies is growing very rapidly. Whereas global turnover expanded by 57% and 36% at currency and constant exchange rates, respectively, activity in most major Asian currencies grew even faster. Renminbi turnover rose particularly strongly.
Three questions follow. First, what drove the rise in trading Asian currencies in the three years? In particular, what explains the string growth in some Asian currencies and the weaker in others? Second, could the exceptionally rapid expansion of Renminbi turnover foreshadow markets? Thirdly, what might the Renmindi's influence mean for the trading Asian currencies?
This special feature first shows that turnover in Asian currencies increased rapidly between 2001 and 2004. Both global factors such as the search for yield and a secular deepening in Asian financial markets contributed to the strong growth. The article then considers the apparently rising influence of the Renminbi on the trading Asian currencies. Evolving expectations of the dollar/Renminbi rate appear to be joining the dollar/yen spot rate in exhibiting significant co-movement with other regional currencies against the dollar. This evidence does not support the conventional wisdom that currency for Asia all trade in dollar bloc. Instead, this may indicate that Asian currencies are increasingly trading with an effective exchange rate orientation.
Traditional foreign exchange trading in Asian currencies generally recorded much faster growth than the global total between 2001 and 2005. Growth rates exceeding 100% were common. Renminbi and rupiah turnover increased particularly strongly. The main exceptions in this broad picture were the Hong Kong dollar, the Singapore dollar and the Malaysian ringgit, activity in which expanded more slowly than the global total. Trading in the Japanese yen also grew relatively slowly over the same period, even by the standards of the major currencies. The strong growth for some Asian currencies over the same period was arguably a part of this global trend. The carry trade strategy benefited high-yielding currencies such as the Indonesian rupiah, just as it did the Australian and New Zealand dollars.
Nonetheless, interest rates are only part of the story. After all, most capital flows into Asia target equities rather than bonds. More broadly, the revival of Asian economies stoked investors? interest in increasing their exposure to the region. The appreciating trend among Asian currencies with flexible exchange rates also made them more attractive as an asset class.
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