Morning Commentary: Between a Rock and a Hard Place

A daily summary and commentary of events and factors that affect the global markets, with a particular emphasis on the foreign exchange markets.

Between a Rock and a Hard Place Share this story: Andrew Kositkun Foreign Exchange Head Trader

The past couple of weeks have seen both an acceleration in Asia FX appreciation and a jump in FX intervention by Asian central banks. In the case of Taiwan, India, the Philippines, China and Thailand, central bank intervention is likely motivated by their respective currencies sitting in the upper part of their recent 10-year ranges. With regard to the pace of reserve accumulation, data shows that the Reserve Bank of India has been the most aggressive central bank. Central banks in Singapore and Hong Kong, both of which have a natural bias to reserve accumulation due to their explicit FX targeting regimes, are the next two most aggressive banks. This is followed by central banks in Taiwan and Thailand, countries where sizable structural current account surpluses support currency appreciation. The key questions then are whether FX intervention can be sustained and whether Asian central banks risk increased scrutiny under the Biden administration. To this point, the growing amount of Asian FX reserves hasn’t gone unnoticed by the U.S. Treasury, as it placed Japan, Korea, Singapore, Malaysia, Vietnam and China among the countries on its monitoring list. Inclusion on this list requires meeting two of the following three criteria: 1) bilateral surplus with the U.S. in excess of $20 billion; 2) current account surplus of 2% of GDP or higher; and 3) persistent one-sided intervention. This is defined as repeated net FX purchases for six out of the previous 12 months that total at least 2% of GDP. This third criterion could be particularly problematic, as it could push India and Taiwan onto the monitoring list. Of course when assessing whether trading partners will be labeled manipulators, appointments matter. On one hand, former Fed Chair Janet Yellen’s nomination to Treasury Secretary likely means a return to conventional currency policy that could lead to increased caution in accusing trade partners of currency manipulation. On the other hand, a notable balance-of-payment hawk was recently added to the Biden transition team. Coincidence or not, more recent price action among Asian currencies has shown moderation in FX reserve accumulation. HERE ARE THE KEY NEWS STORIES FROM OVERNIGHT: As expected, a bipartisan group of lawmakers introduced two stimulus bills — one that has state and local aid and liability protections and one with everything else. Optimism around progress stems from senior members of both parties appearing to be open to this compromise, as pressure grows to vote on the $748 billion relief package that includes everything but liability protections and state and local aid. However, as with seemingly everything in Washington, D.C., resistance remains. U.K. labor market data showed unemployment ticking up 0.1% to 4.9%, but this still beat expectations for a rise to 5.1%. This was a result of a smaller than expected drop in employment, as the country lost 143,000 jobs against expectations for a 250,000 drop. While this jobs report is a positive, it masks underlying weakness. The resurgence of the virus, renewed lockdowns and Brexit uncertainty continue to pressure the labor market. An extension to the government’s jobs support scheme will help until March, after which, data should better reflect reality. The Netherlands, Czech Republic and London have reintroduced stricter lockdown measures. Tensions between China and Australia continue to develop. This time, 50 ships carrying coal from Australia were stranded off the coast of China after Chinese state-owned media reported that China banned coal imports from Australia.  China’s industrial production and retail sales data both came in right at expectations. On a year-to-date basis, industrial production and retail sales rose 7.0% and 5.0%, respectively.

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