Impact of Currency Appreciation

Posted by admin on November 5, 2009 under Articles | 4 Comments to Read

Impact of Currency Appreciation

Yen has been stronger (against USD) than ever. Japanese companies have been crying foul of their stronger currencies eroding their earnings. Nikkei 225 was, at times, thrashed or pulled down by the exporters due to rising yen. Yet, the above survey seems to point to a majority not being affected substantially. Stronger currency makes exports expensive and therefore, net exporting countries may suffer. However, it helps to curb inflation, which can be bad if not contained too. ~ So, is a particular currency appreciation good or bad for a particular stock market? It depends..

SGD / STI
From the onset of the finanacial crisis, the USD has generally been weakening against S$. The recession (happens to both US and S’pore), therefore, it’s the interest rates (downward revision by Fed Reserve), and printing of USD for large bailouts and stimulus that put depreciation pressure on USD. A lower interest rate provide a impetus to exchange USD for better yields in other currency.

First impression is that a stronger SGD makes Singapore’s exports more expensive i.e. other countries importing from us will feel the pinch and may reduce imports or look elsewhere. Businesses dependent on exports to overseas may suffer. So why is STI still near its recent high (around 2700) when SGD has strengthened?

~ Singapore banks are well captialised by International Standards
~ Adequate amount of reserves / savings
~ US funds mgr may buy equities listed in Singapore if the exchange rate remains favourable. Everything else equal, they can get more USD when they liquidate the equities (assuming weakening of USD).

Nevertheless, there is a threshold to any theory. Continuous appreciation of SGD will significantly erode our competitiveness of our exports and MAS has to step in to moderate this at some point, while buying time ~ hoping that USD can find its own footing when the US starts to revise interest rates upwards. However, do note that any support will also has its limits e.g. British government gave up their support on pounds eventually.. Other governments, esp China are diverifying their portfolios to non-USD holdings, which signify that their faith in USD is not as strong.

Conclusion
A delicate balance is required in managing the SGD/USD exchange rate. A strong currency curbs inflation while limiting exports. While a ‘floor’ will be there when central banks buy in USD and/or sell their own currencies, but in the longer-term, the general economic well-being of the US is crucial.

With the STI at around 2640 currently, any substantial swing will be driven by fundamentals rather than further appreciation / caps on SGD, which can be managed to a certain extent.

Franklin
RMAO
11.10am ~ 8 Oct 2009