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The Federal Reserve building on Constitution Avenue is pictured in Washington in March 2019. Recent decisions by the Fed on its policies aimed at stimulating the US economy could persuade investors seeking returns to focus on Asia. Photo: Reuters
Opinion
Macroscope
by Neal Kimberley
Macroscope
by Neal Kimberley

Federal Reserve’s coronavirus policies risk driving capital to Asia

  • Investors seeking yields could flee near-zero interest rates in United States in favour of Asian government bonds and currencies
  • Coronavirus-imposed shift to working from home raising interest in tech stocks and leading exporters such as China, Taiwan and South Korea
Neal Kimberley
Neal Kimberley
Why you can trust SCMP

“Don’t fight the Fed.” That old market mantra is arguably as valid today as ever, especially when it is now crystal clear the Federal Reserve intends to do whatever it takes, and for however long is necessary, to restore the health of the US economy.

The US dollar may struggle in this scenario. Capital may flow into Asian government bonds and currencies.

“We are not even thinking about thinking about raising rates,” Federal Reserve chairman Jerome Powell said on June 10. As regards a timetable for US economic recovery, “it is a long road, it is going to take time,” he continued, but the Fed “can use our tools to support the [US] labour market and the economy and we can use them until we fully recover”.

The vast majority of Fed policymakers now see the federal funds rate – the key US overnight interest rate – staying near zero until at least the end of 2022. At the same time, in pursuance of ultra-accommodative monetary policy, the US central bank will continue with asset purchases and may even deploy measures aimed at achieving yield curve control.

Investors seeking yields will look elsewhere. Some may be drawn to Chinese government bonds, whose portfolio eligibility has been enhanced in recent years by developments such as the renminbi’s inclusion in the International Monetary Fund’s Special Drawing Rights basket and the introduction of the bonds into several global bond indices.

01:25

US labels China a currency manipulator as Beijing allows yuan to sink to lowest level in 11 years amid ongoing trade war

US labels China a currency manipulator as Beijing allows yuan to sink to lowest level in 11 years amid ongoing trade war

That process may have already begun. Leaving aside “a blip lower observed in the second half of March, [Chinese government bond] buying has been unequivocal”, Daniel Tenengauzer, head of markets strategy at US bank BNY Mellon, said in a report on June 11. Over the past month, the five-year yields of these bonds widened by 65 basis points to 2.5 per cent, which “is particularly attractive given that investor attention towards bloated issuance in the US and Europe is rising”.

Meanwhile, in the US equity space, the tech-stock heavy Nasdaq has outperformed the broad-based S&P 500 Index in 2020. This is perhaps partly because of a perception that technology stocks should fare better amid pandemic-related economic lockdowns that have prompted a global upsurge in working from home.

This perception has implications for Asia, too, according to the China Team at independent investment research provider TS Lombard. “The global shift to working from home has led to a surge in demand for related electronic paraphernalia,” they wrote in a June 11 report. “China is the world’s leading exporter of computers, screens, webcams and servers and, along with Taiwan, is benefiting from a major spike in demand.”

South Korean exports for the first 10 days of June rose 20.2 per cent compared with the same period in 2019, with overseas sales of semiconductors and mobile phones both surging. Exports to China from South Korea soared. Such data should have spillover effects in the currency markets, particularly if traders conclude that the trajectory of Fed policy during the next few years will weigh on the value of the US dollar.

02:19

Chinese exporters turn to domestic consumers as coronavirus hits overseas markets

Chinese exporters turn to domestic consumers as coronavirus hits overseas markets
In such circumstances, the foreign exchange market ordinarily might be drawn towards the Chinese renminbi, but any current view on the currency must also incorporate the deterioration in China-US relations and how that might affect the external value of China’s currency. The currencies of other technology-strong economies within China’s economic orbit might have more appeal.

Therefore, as Steven Li Jen and Joana Freire of Eurizon SLJ Capital wrote on June 9, it is perhaps no surprise that “tech-heavy [emerging market] currencies”, such as, among others, the Korean won and the Taiwan dollar, have “registered outperformances so far this year”.

In Singapore, foreign currency worth record US$19.2 billion deposited in April

Issues around strained cross-strait relations might lead some investors to question how much more upside there is for the Taiwan dollar. There’s also the possibility the monetary authorities in Taipei might not necessarily embrace continued Taiwan dollar appreciation. “Taiwan’s central bank has started to note concern about the strength of the Taiwan dollar,” TS Lombard’s senior macro strategist Oliver Brennan wrote on June 10, seeing the potential for the Taiwan dollar to depreciate versus the won.
Covid-19 has afflicted the entire world, but tech-heavy economies in Asia might be better placed to bounce back. Meanwhile, in the United States, the Federal Reserve has made it abundantly clear it will do whatever it takes to get the US economy back on track.

The US central bank has set its own monetary policy course. One way or another, global investors might well decide their own best interests now lie in setting a course for Asia.

Neal Kimberley is a commentator on macroeconomics and financial markets

This article appeared in the South China Morning Post print edition as: Federal Reserve’s policies could drive more investors to Asia
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