With global investors shunning risk during the current quarter, it has been a time of acute suffering for most Asian assets and currencies.
Easily the worst-performing currency in Asia has been the Indian rupee, which overnight registered another record low against the dollar. Buffeted by much weaker growth, large twin deficits, high inflation and an acceleration in capital outflow, the rupee has been under sustained assault for quite some time. In an attempt to thwart the downward pressure on the currency, the Bank of India has been selling some of its stockpile of foreign exchange reserves. Absent a return to friendlier conditions for risk assets, it is difficult to see this downtrend in the rupee ending any time soon.
Elsewhere in Asia, the Bank of Indonesia has vowed to offer dollar deposits soon as a way of inhibiting the pressure on the rupiah, which has been the second-worst performing currency in Asia in 2012. Overnight, the rupiah fell to its lowest level against the dollar since late 2009. The likes of the Thai baht, Malaysian Ringgit, South Korean won and Singapore dollar have also been declining over recent weeks.
A major beneficiary of this flight from Asia’s growth currencies has been the Japanese yen. Nearly all of Asia’s major currencies have recorded a decline against the yen in the current quarter of 6-8%; the damage sustained by the rupee has been even worse, down nearly 13% against the yen in Q2. This most recent phase of yen strength has been incredibly unwelcome, both for the MOF and investors in Japanese equities. The Topix for instance has plummeted 15% in the current quarter. Other Asian bourses have not been immune - the Hang Seng is down more than 9% over this period, with the Kospi 8.5% lower.
In contrast, Chinese equities have performed remarkably well, with the Shanghai Composite up 5% in Q2. With the economy apparently slowing more rapidly than expected, the huge outperformance by Chinese shares is both surprising and noteworthy. In part, it reflects the repeated assurances from Beijing that growth policies will be unveiled over coming months. In addition, the decline in the yuan has also helped. Indeed, the current month is the worst for the currency in five years. Suddenly, the cacophony of commentators arguing that China’s currency is massively undervalued has gone very quiet.