Asia pushes back on 'excessive' currency moves amid enduring dollar strength

Top currency officials in Asia are pushing back on bets that sent their currencies to multi-month lows this week, deepening their underperformance for the year.

Japan finance officials have warned all this week against the "excessive" depreciation of the Japanese yen. Late Tuesday, Malaysian officials flagged the same concerns for the ringgit, while China fixed the yuan at a stronger-than-expected daily rate three times this week to prop up the currency.

Contrasting moves in the world's major currencies — including the Japanese yen, the Chinese yuan and the U.S. dollar — underscore the differences in domestic interest rates and monetary policy cycles. It comes as central banks around the world continue to face sticky inflation, sagging growth in the aftermath of Covid-19, the Russian war on Ukraine and an energy crisis.

Against the U.S. dollar year-to-date, the Japanese yen has slumped more than 9%, while the Malaysian ringgit fell about 6% and the Chinese yuan slid nearly 5%. All three currencies tested lows not seen since October and November against the U.S. dollar this week and are among the most battered in Asia this year.

The risk of Japan's finance ministry intervening in the forex market has increased, Carol Kong, an economist and currency strategist with the Commonwealth Bank of Australia, said in a note Wednesday. Authorities may be buying the Japanese yen "with the rise in USD/JPY set to run further," she added.

"However, we note it is the speed of change, rather than the level, that matters most in the Ministry of Finance's decision to intervene," said Kong. "Potential forex intervention can add to the volatility of the Japanese yen."

A policy divergence between the Bank of Japan's ultra easy monetary policy and the U.S. Federal Reserve's aggressive tightening stance against inflation is driving the U.S. dollar's strength.

"We are closely watching currency moves with a strong sense of urgency," Reuters reported Wednesday, citing Japan's top currency diplomat Masato Kanda, reiterating his Monday comments. "We will respond appropriately if it becomes excessive."

Finance Minister Shunichi Suzuki said Tuesday there were "sharp and one-sided moves" in the yen's slide, which may warrant appropriate action by the Japanese authorities if the trend became excessive, Reuters reported.

The risk of yen intervention is high if the currency trades in the 145-150 yen to the U.S. dollar, DBS senior forex strategist Philip Wee said in a Wednesday note. The Japanese currency was hovering at about 144 against the greenback in Asia trade on Thursday.

Last year, Japan's Finance Ministry intervened with roughly $68 billion to prop up the yen on three separate days: Sept. 22, Oct. 21 and Oct. 24 — as the currency notched 150 against the greenback, weakening to levels not seen since 1990.

Malaysia's central bank said late Tuesday that "the extent of the recent depreciation of the ringgit is not reflective of Malaysia's economic fundamentals."

"Bank Negara Malaysia will intervene in the foreign exchange market to stem currency movements that are deemed excessive," assistant governor, Adnan Zaylani, said in the statement.

"While the value of the ringgit will continue to remain market-determined, BNM expects that ongoing measures by the government to further strengthen the economy will help to ensure that the ringgit better reflects the country's fundamentals," he added.

The central bank said further clarity on the U.S. Federal Reserve's interest rates and possible positive signs from stimulus measures out of China may provide support to the ringgit and Asian currencies in general.

In a client note on Wednesday, Goldman Sachs economists pointed to the deterioration in Malaysia's broad balance of payments — driven by a large increase in outward foreign direct investment, investment income outflows and bond outflows — as a key reason underpinning ringgit weakness.

"In any event, we think the Central Bank will only step in to trim volatility, as opposed to trying to alter the broader direction of USD/MYR," they added.

The People's Bank of China set stronger-than-expected daily reference rates for the Chinese yuan on three out of four days so far this week, drawing the lines of tolerance for its depreciation.

The PBOC's daily mid-point for the onshore yuan is closely watched for cues relating to its official position on the yuan's movements. The central bank allows the currency to trade within a narrow band of 2% from each day's midpoint.

On Thursday, the PBOC set its daily mid-point reference rate for its managed currency at 7.2208 yuan per U.S. dollar, versus a Reuters estimate for 7.254 yuan per U.S. dollar. The onshore yuan lingered at its lowest in eight months on Thursday, hovering at about 7.244 against the greenback.

The Chinese government has been so far reticent in its economic stimulus despite sagging growth in the world's second-largest economy. Official data on Wednesday showed that cumulative profits in China industrial firms sank 18.8% in the first five months of 2023, adding to the gloom.

"Empirical experience of post-intervention currency performance suggests that central bank resistance works at best to slow the momentum of currency moves but does little to alter the trend," JP Morgan economists wrote in a Wednesday note.

"Considering that the growth pessimism and widening yield differentials are at the core of CNY weakness, the return of CNY strength requires these two fundamental headwinds to subside more durably," they added.