Asian Currency Outlook In 2012

Includes: FXI, FXY, JYN, PGJ
by: Zecco

By Paul Quintaro

Currency traders had a particularly interesting year in 2011.

The expiration of the second round of quantitative easing (QE2), multiple interventions by the Bank of Japan (BoJ), and the initiation of a hard peg of the Swiss franc to the euro all contributed to an intensely volatile forex year.

While it will be hard to top, 2012 could prove to be equally intense, as economic conditions continue to remain uncertain.

While there is no predicting the future, a number of events could shake up the markets in the New Year, particularly for currencies in Asia.

To the misfortune of Japanese exporters, the yen demonstrated tremendous strength in 2011. Although the BoJ was given international support in its early interventions, that support largely waned throughout the summer, and the BoJ was forced to act alone when it intervened again to weaken the yen in the early part of the fall.

While the BoJ has thus far shown an unwillingness to take any real aggressive actions, following the precedent set by the Swiss, the BoJ could shock the market in 2012 by initiating its own peg. The Japanese economy—dependent upon exports—has shown marked weakness in recent weeks, and a currency peg may be the bazooka the Japanese need.

Another area of interest in the Asian economic sphere continues to be China, specifically the value of its yuan against the dollar and the resulting effect on other Asian currencies.

Currently, the yuan is directly pegged to the U.S. dollar—preventing its value from shifting too significantly.

Still, the Chinese could opt to adjust their peg outright in 2012, which would have a tremendous effect on the value of the yuan.

Pressure has been mounting on the Chinese by U.S. politicians and policy makers to adjust the value of the yuan upwards, strengthening the yuan against the dollar and thereby reducing the trade surplus the country enjoys with the U.S.

At the same time, however, China’s economy is showing some mild weakness, and Chinese policy makers could actually go in the opposite direction and weaken the yuan further against the dollar in an effort to continue creating jobs for the millions and millions of migrant Chinese workers.

If China’s economy continues to weaken in 2012, it could have a notable affect on other Asian currencies, particularly the Australian and New Zealand dollars. Both currencies have shown strength in 2011, as the demand for their natural resource exports remained high.

If China’s growth slows, the demand for these exports could slow as well, and the currencies of Australia and New Zealand could quickly reverse their positive trends.

As currency traders look ahead in 2012, they should consider keeping an eye on Asia. Shakeups in China and Japan could lead to tremendous volatility in all the region’s currencies.