Invest In Appreciating Currencies of East Asia

It seems to many investors that currencies around the world keep sinking in value as historically low interest rates and the supply of money in circulation continue on their present trajectories. It is true that in many of the industrially advanced countries a policy of easy money has been adopted. It is the result of desperate attempts to stimulate moribund domestic economies.

The United States, Europe and Japan are all engaged in using monetary policy to attempt a recharge of their low growth or stagnant domestic economies. These currencies as a result have taken a beating in the foreign exchange markets and have made investors wary.

However, there are a number of countries that have not engaged in these practices for obvious reasons. One being their domestic economies are growing sufficiently to make a devaluation of their currency unnecessary.

Another reason for some countries is the calculation among their political and business elites that their large foreign exchange holdings will permit them to ride out the present economic difficulties.

Singapore is a country where the central bank uses the exchange rate rather than borrowing costs as its main policy tool. The policy here is to allow what is coined as “a modest and gradual” appreciation in the Singapore dollar (SGD). This city state has resisted any monetary easing since October of 2011. The lack of enthusiasm for a monetary loosening of the currency can be explained by a tight labor market and a persistent demand for new housing. These two factors are placing inflationary pressures on the domestic economy.

The Gross Domestic Product (GDP) of Singapore stands at 275 billion. An economic growth rate of 4.1% for 2013 and a forecast of 2-4% in 2014 are seen as sufficient to forestall a government monetary intervention. In the last quarter of 2013 alone the Singapore dollar climbed against the American Dollar (USD) by 2.3%.

The economy of Singapore grew 5.5% in the fourth quarter of 2013 and 5.1% in the first quarter of 2014. Manufacturing and construction is accelerating but the service sector is slowing somewhat.

The government of Singapore can sustain the present course because of the island nation’s current-account surplus. As the United States Federal Reserve took steps to somewhat scale back its monetary stimulus policy it caused a depreciation in many emerging and developing economies. This included most of Southeast Asia but not Singapore.

The currency at present has reached a conversion rate of $1.00 USD equaling 1.2517 SGD. The rate has declined from above 1.275 from the end of March of this year alone. The SGD is getting closer to parity with the dollar already breaching 80 cents USD in value this month.

China despite some expectations for a reversal has a currency that continues to appreciate. Despite a slowing economy China is still growing at a much faster rate than any other major economy in the world. There are many people who still feel the yuan is still very much undervalued.

In 2011 the yuan climbed by 4.7% against the US dollar. In 2012 it rose another 1.2 % and last year 2.9% more.

It may not seem like a major increase but a close to 10% increase over 3 years is not a terrible investment and in retrospect was a sure thing with interest rates near record and at record lows in many of the advanced economies of the world.

The Chinese yuan is more difficult to make accurate assessments of since the currency is still subject to some government restrictions. It is still not fully convertible but moving in that direction.

The yuan has appreciated by some 50% in real terms in the last 20 years. In comparison the American dollar has fallen 7% and the Japanese yen 40% over the same time period.

The increase in the value of the yuan will need to slow somewhat. It is beginning to endanger Chinese competitiveness. There are some studies that show that the cost advantages of manufacturing in China have all but been eliminated. This is a result of wage inflation, declining increases in worker productivity, and the continuing appreciation of the yuan.

As a result of these realities, a number of American and European firms are relocating elsewhere. Often it will be closer to their customer markets to gain even more cost advantages based on reduced transportation costs.

The continuing appreciated yuan has put pressure on Chinese corporate profits but the trend will continue for a while longer. This is partly because China is permitting internal investment but restricting capital outflows. Eventually the government of China will have to allow Chinese investors greater opportunities to invest abroad to relieve some upward pressure on the yuan.

The present exchange rate is 6.21 Chinese Yuans (CNY) per American dollar (USD).

The continuing large purchases of gold by the Chinese government over time, along with the huge foreign exchange reserves in its portfolio, will continue to provide additional strength to the yuan.

South Korea also has a currency that continues to strengthen. Of course the biggest gains in appreciation have already been made. The Korean won (KRW) has jumped to a 5 year high this month based on the continuing strength of South Korean exports. The Koreans have maintained a trade surplus since February of 2012.

As recently as the end of March a dollar (USD) would allow you to purchase over 1,075 KRW. This has dropped to 1,041.70 KRW this week.

Taiwan is in a similar situation with its currency buoyed by the large foreign exchange reserves that this island nation maintains. The Taiwan Dollar (TWD) has held value over time because of the prudent financial leadership provided by the government and its business community. Continuing strength in the export sector enhances the value of the currency.

Near the end of March a dollar (USD) would permit you to purchase over 30.5 TWD. This week it has declined to 29.53 TWD.

There are a number of other currencies in this part of the world that may prove to be good investments as well particularly as the region continues to grow economically in the 21st century.