Research firm DBS noted on Monday that Greek sovereign debt crisis, US- China trade tensions and monetary tightening by the Asian central banks are the three main issues that are likely to spill over into the second quarter of 2010 and impact the currency markets. This follows an uninspiring first quarter when politics dominated economics.
The euro faces selling pressure from the threat the Greek debt crisis poses to the stability of the European Union.
DBS noted that the Euro-zone leaders and policy makers failed to show signs of resolving the crisis and prevent Greece's sovereign debt troubles from spilling over into weaker member nations.
Greece still needs to refinance 23 billion euro worth of debt maturing between April 19 and May 23. Of these, Greece's debt agency claims that it needs to borrow 16 billion euros as it has a positive cash balance of 6 billion euros.
DBS highlights the U.S.-China trade tensions, which has worsened due to the yuan exchange rate, as the second issue. U.S. lawmakers are pushing the U.S. Treasury to name China a currency manipulator in its next Currency Report scheduled for release on April 15. However, China's commerce ministry warned that Beijing would not "turn a blind eye" if this happens. Also, China does not want the yuan issue to be politicized and had called for global exchange rates to be discussed at the next G20 meeting in June.
The market is still frustrated that the yen is not weakening, DBS noted. The Japanese government has increased its intervention war chest in its fiscal 2010/11 draft budget for the first time in six years early this month. In addition, the Bank of Japan eased its monetary policy on March 17 by doubling the amount of its fixed rate market operation to 20 trillion yen. The research firm noted that these factors together were aimed at weakening the Japanese currency In reality, Japan is caught between the use of the yen as a safe haven against the Greek crisis in Eurozone and a proxy for a lower USD against Asian currencies.
According to DBS, it is the fear of more JPY appreciation from these twin factors that prompts Japan to open the door on intervention. Hence, intervention is likely to be reactive than proactive.
Apart from the above factors, DBS noted that markets are also becoming uncomfortable that monetary tightening may be finally picking up momentum in Asia. China started the monetary tightening by announcing surprise hikes in the reserve requirement ratio on January 12 and February 12. Malaysia also surprised with a rate hike on March 4, and has indicated that it would not be the last to bring rates back to normal levels. India also surprised by lifting rates on March 19, which was seen as the first step to tame inflation.
Theoretically, higher Asian rates could be positive for Asian currencies, especially with the G3 still on easy mode, DBS noted. However, in light of the crisis in Eurozone and the deterioration in US-China trade relations, monetary tightening in the world's top growth region could also hurt risk appetite.
For comments and feedback: editorial@rttnews.com