The performance of the US dollar against most currencies in the first quarter resembled something akin to a split personality.
The dollar ended 2013 on a bullish note as the market was expecting the moderate to strong recovery from the US economy. However US economic data that came out was weaker than expected, thus the dollar began to weaken from its peak at the end of January.
Asian currencies in Q1 were neutral (the baht, the Singapore dollar, the Malaysian ringgit) to weaker (the Philippines peso, the South Korean won, the Taiwanese dollar, the Chinese yuan) against the US dollar.
Only Indonesia’s rupiah and India’s rupee were stronger against the dollar as their currencies depreciated heavily last year and the improvement in their economic conditions has been reflected in their appreciating currencies.
As for the baht, it has been trading in a relatively tight range in Q1 – at 32.10-33.02 to the US dollar.
The dollar failed to sustain its rally above 33.00 when the US economic data came in weaker than expected, particularly the non-farm pay roll data.
The non-farm payroll number was 84,000 in December, 129,000 in January and 175,000 in February. These were lower than the monthly average of around 200,000 in 2013.
Nevertheless, the dollar seemed to have found strong support around the 32.15-25 level, testing that support level three times.
Furthermore, the dollar may have finally built a solid base when the US Federal Reserve made its latest open market committee statement.
In addition to reducing the pace of the bond purchasing additional $10 billion, the Federal Reserve’s tone on the rise of US interest rates was considerably more bullish than in previous statements.
The Chinese yuan is also in a bit of a state of flux. The current round of yuan strengthening has been on since the middle of 2010 when it was at around 6.8 RMB per US dollar.
However the People’s Bank of China (Chinese’s central bank) recently announced that it had widened the trading band in which the RMB could fluctuate mid-point daily from 1% to 2%. But instead of continuing to strengthen as it had done, it has weakened.
The funny thing about the currency market is that many times it reacts the opposite of what it is suppose to do.
In the medium to long run the yuan will likely resume its long-term trend.
Its current weakness (YTD 2.6% depreciation) is due to two factors. First, the currency market likes safe and predictable situations.
China continuous trade surplus (more than 10 years) equals a stronger yuan. When the yuan is on predictable path and strong, everyone was happy to ride this horse.
But when the PBOC widened the band, it created uncertainty in the currency markets.
Capital markets don’t like uncertainty and the disciplined investors got off the horse first and asked questions later.
The second factor has to do more with real money. When the trend of the yuan was clear, exporters and investors in yuan assets were happy to sell US dollars forward.
But when the yuan moved in a direction against those positions, they had to be cut and covered and thus you see the current weakness in yuan.