Speaker 1: US President Trump's tariff policies have had a profound impact
Speaker 1: on global financial markets, but one of the most surprising
Speaker 1: has been the sell off in the US dollar. Since
Speaker 1: the president's inauguration, the US dollar has weakened by over
Speaker 1: nine percent versus a basket of major currencies, as measured
Speaker 1: by the DXY Index. What's also unique is that this
Speaker 1: sell off has occurred during times of financial stress in
Speaker 1: US equity and bond markets, leading some analyst to question
Speaker 1: whether the currency is losing its safe haven status. This
Speaker 1: fear was further exacerbated when Moody's downgraded the US credit
Speaker 1: rating from triple A to double A one. Are we
Speaker 1: entering into a period of d dollarization? What does this
Speaker 1: mean for Asia's currencies? And what about the region's central banks,
Speaker 1: companies and financial institutions, many of whom are the biggest
Speaker 1: holders of US treasuries and are heavily exposed to FX risks.
Speaker 1: Listening to Aga Centric from Bloomberg Intelligence. I'm John Lee
Speaker 1: here in Hong Kong. Today we have a regular on
Speaker 1: the show. He's my colleague Stephen Chu, Chief Asia FX
Speaker 1: and Great Strategies for Bloomberg Intelligence. Stephen, welcome to.
Speaker 2: The show Hi, John, thanks for having me. Stephen.
Speaker 1: Are we entering into a period of d dollarization, Well,
Speaker 1: I would.
Speaker 2: Say yes and no, because this period actually has started
Speaker 2: up over ten years ago in twenty fourteen when Thursday's
Speaker 2: Russia and Cremer incident, and apparently Russia has start to
Speaker 2: offload their US treasuries and then followed by of course
Speaker 2: China also start to reduce their holdings. So it has
Speaker 2: started just at a very gradual pace. And what happened
Speaker 2: this year, especially in April, I would say, is just
Speaker 2: acceleration of it. And if you ask me, it's still
Speaker 2: somewhat orderly. Of course, it's very rare that we saw
Speaker 2: US dollar, US treasury, and US equities all setting off
Speaker 2: at the same time. So it's very clear that market
Speaker 2: had enough of the TI riff game. So they don't
Speaker 2: want to care about the reciprocal tariff. They don't want
Speaker 2: to wait for any trade trials or trade deal. They
Speaker 2: just vote by action that they're questioning the credibility of
Speaker 2: the US, the credibility of the dollar, and of course
Speaker 2: the US Treasury. So I would say that's why, yes,
Speaker 2: I know it has started before, it's accelerating, and whether
Speaker 2: it's going to continue to accelerate really depends on what
Speaker 2: the US administration does, so we're going to look forward
Speaker 2: to that going forward.
Speaker 1: I want to just repeat what you said, and you
Speaker 1: refer to the events in April. Now, when the US
Speaker 1: announced reciprocal tariffs, the S and P five hundred sort
Speaker 1: off by more than twelve percent. In the next few days,
Speaker 1: blond yuods were also rising, but we had surprisingly the
Speaker 1: US dollar sell off. Now has these things happened before.
Speaker 2: Yeah, at least memory search. I've been the futual about
Speaker 2: fifteen years. I've probably never seen that. It's quite interesting
Speaker 2: because if we drill down into the performances, so the
Speaker 2: dollar weakness was very apparent against the major currencies, especially
Speaker 2: the Euro and the end. So that tells you that
Speaker 2: the market theme is about changing the view of which
Speaker 2: currency is more credible as a reserve currency. So we
Speaker 2: know when we look at the reserve currencies, there's the dollar,
Speaker 2: there's a euro, Yen Stirling. Of course, Chinese un is
Speaker 2: a very interesting one and market always lost to talk
Speaker 2: about it, but practically speaking, the UN didn't really rally
Speaker 2: right away, meaning that market at the end of the
Speaker 2: day is still more comfortable with the uro and the yen,
Speaker 2: the major currencies, and in fact Asian currencies didn't already
Speaker 2: against the dollar. Some actually when weaker, especially the un
Speaker 2: before really rallying towards the end of April and early May.
Speaker 1: So are we starting to see a change in the
Speaker 1: paradigm of FX investing now? I know a lot of
Speaker 1: FX strategists talk about this smile theory for the US.
Speaker 1: Can you give us like an FX one O one?
Speaker 1: What does this smile theory mean?
Speaker 2: Yeah? Sure, So it's a very that's very well known
Speaker 2: in the fics community. So it's proposed by Stephen Lee
Speaker 2: Jen in two thousand and one. It's a relationship between
Speaker 2: the US dollar and the US economy, so very simple.
Speaker 2: When the US economy is super strong or super weak,
Speaker 2: we see a strong dollar. When it's super strong, we
Speaker 2: have the fat hiking rates them from an interest rate
Speaker 2: or carry perspective. So we saw a few years ago
Speaker 2: after COVID, so the US dollar was super strong. However,
Speaker 2: in the extreme end, when we have say a US recession,
Speaker 2: a global recession, everybody cutting rates. It's a risk of
Speaker 2: scenario and the dollar, of course, we all know that
Speaker 2: it's really the top most credible reserve currency, at least
Speaker 2: before this year. So we have a very strong dollar
Speaker 2: at the extreme ends, and only in the middle, in
Speaker 2: the middle of the smell, we have a weaker US
Speaker 2: dollar because when the world is peaceful, then everybody used
Speaker 2: the dollar as a funding currency to buy something else.
Speaker 1: Okay, so that's the dollar smile. Now, what's happening now.
Speaker 2: Yeah, I would propose, of course, there are some people
Speaker 2: talking about it already, and we were one of the
Speaker 2: early ones proposing this so called dollar frown theory. So
Speaker 2: it's just the extreme opposite compared to a smell. So
Speaker 2: what happens is when the US economy is super strong
Speaker 2: or super weak, we'll see a weaker US dollar. The
Speaker 2: rationale it's because of fiscal concerns. So when we look
Speaker 2: at the extremements, when the US economy is super strong
Speaker 2: and the fact cannot cut rates, just like what's happening now,
Speaker 2: market will actually dealt whether the US government can refine
Speaker 2: them as the debt at such a high cost, given
Speaker 2: that the US really funded spending with foreign flows. When
Speaker 2: that's in doubt, we saw what happened. US treasury is
Speaker 2: selling off really since April to now, it's still going on. However,
Speaker 2: in the other end, when we saw say a global recession,
Speaker 2: a completely risk of scenario, the dollar is no longer
Speaker 2: the top choice for safe haven. People will go to
Speaker 2: eurog to yen, and go to gold, and gold will
Speaker 2: be more sort of currency. Like during this juncture in
Speaker 2: the middle, when everything is fine, when we have no
Speaker 2: trade will the world is peaceful, then market may actually
Speaker 2: step back a little bit in questioning the US dollar,
Speaker 2: and we saw US dollar strengthening, which is why, as
Speaker 2: an example, we saw when the news about the US
Speaker 2: China trade tariff delay for ninety days came out, the
Speaker 2: dollar did rebound for a bit.
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Speaker 1: and share. We had Moodies downgrade the US credit rating.
Speaker 1: Was this a big issue in your view, not.
Speaker 2: Really, of course everybody talk about so it's no longer
Speaker 2: the highest rating government dat but it doesn't matter because
Speaker 2: eventually this is going to happen. And even if all
Speaker 2: these rating agencies don't address the concern, every single market
Speaker 2: player knows about the structural slash fiscal vulnerabilities in the US,
Speaker 2: so it's just a matter of time to see a
Speaker 2: proper reflection of that. So that's why after that move,
Speaker 2: it's not really in use. But we saw the dollar
Speaker 2: selling off again and the US treasuries as well.
Speaker 1: Okay, so it sounds like the US is slowly starting
Speaker 1: to lose its safe haven asset status.
Speaker 2: Would you say, yes, definitely start losing, but from a
Speaker 2: very high base and at a very gradual pace, because
Speaker 2: if you ask me as an X trader, as a practitioner,
Speaker 2: I know everybody want to get out of the US dollar,
Speaker 2: but the reality is there not much to go to really,
Speaker 2: like there's as much gold as you can buy, there's
Speaker 2: only as much safe government assets out there beyond the
Speaker 2: US treasuries. So I would say it will still be
Speaker 2: a very gradual process, but at least it will continue
Speaker 2: going forward.
Speaker 1: And that's why you mentioned gold. Now, is that why
Speaker 1: gold price is a continuing to go up.
Speaker 2: Yeah, especially we know gold is priced in the US dollars,
Speaker 2: so it's kind of like a mirror image. As long
Speaker 2: as the dollar continues to weaken, we'll see record goal
Speaker 2: price every now and then. And central banks are really
Speaker 2: the ones that we want to follow. They are the
Speaker 2: smart people, and they have been buying really since twenty
Speaker 2: twenty two, or buying at a quicker pace right after
Speaker 2: COVID because they saw what's coming. We saw a more
Speaker 2: bivocated world with all inflation anchoring. The fat had to
Speaker 2: rate to higher levels, but still not really dealing with
Speaker 2: the inflation issue. So that's why emerging Markeuess central banks,
Speaker 2: leading really by China, India and Turkey for example, they're
Speaker 2: all buying gold because they see this dollar era coming
Speaker 2: to be questions.
Speaker 1: And I know you don't cover it, but I know
Speaker 1: you get this question all the time as well. Does
Speaker 1: that same theory apply to cryptocurrencies.
Speaker 2: It's a little bit different because when we look back
Speaker 2: in history, usually when gold play a currency role, it's before, during,
Speaker 2: and after a major geopolitical incident, so namely the World
Speaker 2: War was so the gold being a unit and accounts
Speaker 2: storage of value and transaction. Being a transaction unit, it's
Speaker 2: more credible like these days, like you still can't really
Speaker 2: transact with cryptocurrency, So I would say cryptocurrency might be
Speaker 2: a good choice if you have a portfolio that you
Speaker 2: want to exploit a weaker used dollar, But I would
Speaker 2: say goal to still play a larger role in this
Speaker 2: D dollarization trend, at least a larger share, because, after all,
Speaker 2: crypto it's also a price in US dollar. So if
Speaker 2: you ask me, like, I'm no expert in crypto, but
Speaker 2: I would say it's just a dollar derivative or dollar assets,
Speaker 2: unlike gold.
Speaker 1: Okay, so we've talked about the US the D dollarization.
Speaker 1: What does this all mean in terms of your forecards
Speaker 1: for the US dollar as well as against Asian currencies.
Speaker 2: Yeah, so simply put, we're going to see a broad
Speaker 2: weekending in the US dollar. But of course there are
Speaker 2: different performances across major currencies, let alone Asian currencies, so
Speaker 2: we have to look at fundamentals. When we look at Asia,
Speaker 2: one reason why they didn't really rally before the majors
Speaker 2: until later in April was that we saw that their
Speaker 2: macro fundamentals were still quite vulnerable to the trade tar
Speaker 2: riff because we know trade tar riff target China, targets
Speaker 2: Vietnam like a lot of the Asian partners. So at
Speaker 2: the end of the day, if we don't have a
Speaker 2: trade deal and if the effective tarret still end up
Speaker 2: higher than before the trade will, then that's going to
Speaker 2: hurt their economies. And we know they are very growth
Speaker 2: sensitive and capital flows into Asia. Really it's betting on
Speaker 2: their growth. Therefore, even though in a weaker dollar backdrop,
Speaker 2: even if Asian currencies rally, it's going to be more
Speaker 2: gradual compared to the g tens. Now when we look
Speaker 2: at little podcasts the risk of larger appreciation. We saw
Speaker 2: what happened to the Taiwan dollar in early May, and
Speaker 2: possibly to Korean one and even Japanese yen. But that's
Speaker 2: for different matter. That's because of the nature of those
Speaker 2: economy and also with other players like the life insurance
Speaker 2: companies and pensions.
Speaker 1: And I wanted to talk about the Taiwan dollar in
Speaker 1: a few minutes, but I wanted to draw back to
Speaker 1: the beginning of this year. Now, I remember a lot
Speaker 1: of FX strategists were saying that US tarists was supposed
Speaker 1: to support the US dollar, and these developments are surprised.
Speaker 2: Not really now it did happen because market always priced
Speaker 2: in development before it happened. And when we look at
Speaker 2: the efics market pricing, it really started since late last year,
Speaker 2: before the US presential election in November, and then all
Speaker 2: the way until really early January, so that has been
Speaker 2: priced in by the market. We saw stronger dollar across
Speaker 2: the board across Asian currencies, and not until earlier this year,
Speaker 2: and markets start to question whether that policy could really
Speaker 2: work to the US. And also to a point also
Speaker 2: thanks to the US President Donald Trump being so hardworking
Speaker 2: and posting about new policies every day, especially on tariff.
Speaker 2: So market, as we said earlier, might really be fed
Speaker 2: up with that. So they just decide, Okay, we're going
Speaker 2: to exploit your structural factors for the US. Usually it's
Speaker 2: more a medium to the longer term, but market decided
Speaker 2: they're going to bring it forward and treat it as
Speaker 2: a short term driver. Therefore the dollar stopped strengthening and
Speaker 2: start to weaken.
Speaker 1: Okay, let's talk about the tow one dollar, because it
Speaker 1: had a big move was it in May? Its strengthened
Speaker 1: by over seven percent over a few days. Now I
Speaker 1: think it was up by over nine percent versus the
Speaker 1: US dollar for the whole month. Tell us what happened
Speaker 1: to the Taiwan dollar and why was the move so abrupt?
Speaker 2: Yeah, I think it was about over ten percent at
Speaker 2: one point for the first two days until the central
Speaker 2: banks step in. So what happened was quite clear. So
Speaker 2: we know most of the Asian economies exporters, they are
Speaker 2: the big players. But also we have to at least
Speaker 2: from now on market we have to pay a lot
Speaker 2: of attention to and other big players, which are the livers.
Speaker 2: So livers are most prominent or dominant in Taiwan of
Speaker 2: course Taiwan, and then we have self current japen Asulla.
Speaker 1: You're talking about life insurance life insurance companies.
Speaker 2: Yeah, so they have a lot of overseas investments just
Speaker 2: because the local market weren't big enough to absorb, so
Speaker 2: they don't have really a big logo born market. So
Speaker 2: in Taiwan's case, given the amount of the life insurance policies,
Speaker 2: they have to look for investments overseas, and clearly the
Speaker 2: US market is really their major destination. So whether it's
Speaker 2: US treasuries, and to some extent, of course, it's actually
Speaker 2: they're more interested in the dollar credit with high yield,
Speaker 2: so they have a lot of dollar assets holding overseas.
Speaker 2: What happened was now we have no proof and we
Speaker 2: don't know whether they have started selling the assets, but
Speaker 2: if they sold market really starting to question about the
Speaker 2: US status or the US dollar status, US treasury status,
Speaker 2: then it makes sense for them to at least either
Speaker 2: increase hatching or to sell the assets. So that was
Speaker 2: what happened. They probably just try to hatch a little
Speaker 2: bit of their dollar holding by they usually do it
Speaker 2: through NDF so selling Dollar Tower and DF but probably
Speaker 2: given that the market was so feen, especially I remember
Speaker 2: it was a mainland China holiday, price actions got exaggerated
Speaker 2: and then we saw a huge appreciation in the Taiwan dollars.
Speaker 2: So that's what happened until the central bands step in.
Speaker 2: Of course, now the tides has come a little bit,
Speaker 2: but it doesn't change the fact that at least for Taiwan,
Speaker 2: they're holding over seven hundred billion US dollar or foreign assets,
Speaker 2: mostly in the US dollar. At some point they will
Speaker 2: have to deal with it either they have to hatch
Speaker 2: more of it, or they'll have to out it. In
Speaker 2: either case, it's going to hurt the US dollar. Also,
Speaker 2: one very popular ethics theme is market or at least
Speaker 2: a taiwan Is players, they're trying to hash through other currencies.
Speaker 2: It makes sense because everybody hashing dollar Taiwan has made
Speaker 2: the hedge and cost so expensive. And now when we
Speaker 2: look at the NDF, say three months or one month NDF,
Speaker 2: the implied annualized hatching cost is double digit over ten percent.
Speaker 2: That's crazy. So you pay ten percent to hash an
Speaker 2: appreciation and as you suspension, it's not easy to have
Speaker 2: a ten percent appreciation, So it's that expensive. So what
Speaker 2: happened at least hearing from market people, some people hash
Speaker 2: it through the current one. And also going forward, we
Speaker 2: may look at other Asian currencies. A lot of the
Speaker 2: Asian currencies will be looked in to be used as
Speaker 2: a proxy to hatch. So oh in all, the end
Speaker 2: game is pretty straforred. We're going to see stronger Asian
Speaker 2: currencies as a whole against the US dollar.
Speaker 1: And do you think what happened to the Taiwan dollar
Speaker 1: that rapid appreciation, do you think that could be a precursor.
Speaker 1: Could this happen again to other currencies.
Speaker 2: It's going to be a precursor. Actually, what makes things
Speaker 2: interesting is now it had the Taiwanese authorities attention, so
Speaker 2: they're going to stop that from happening again, at least
Speaker 2: in the near term. So everybody, whether it's on shore
Speaker 2: Taiwanese players or even offshore players betting them to go
Speaker 2: for more hedging. We will look for other Asian currencies.
Speaker 2: The Korean one is one of the obvious one that
Speaker 2: people like because of course we have the news about
Speaker 2: US and South Korea talking about ethics during the trade negotiation.
Speaker 2: So even from that perspective, the kourent one could have
Speaker 2: some room for appreciation, and both economies export a lot
Speaker 2: of tech products. We know about the smartphones, we know
Speaker 2: about other semiconductors, so therefore kourent one is really one
Speaker 2: of the no brainer as a proxy hetch. We also
Speaker 2: had a look at other currencies. We go through the
Speaker 2: correlation some of the interesting ones, including the taigbart and
Speaker 2: the Malaysian ring its, so we'll look after those currencies
Speaker 2: as well.
Speaker 1: Okay, and what about the japan currency the yen. Now
Speaker 1: I noticed like Japan CPI rose by I think over
Speaker 1: three point five percent in April, and I saw the
Speaker 1: headline news it was highest amongst G seven countries. This
Speaker 1: is quite unbelievable. See inflation's returning back to Japan. What
Speaker 1: does this mean for the currency.
Speaker 2: To be honest, this is just a continuation of what
Speaker 2: has happened over the last two years ore and a
Speaker 2: half years. So Japan inflation, as you have mentioned, if
Speaker 2: you look at it, say the headline inflation or the
Speaker 2: core inflation, both of them on a year and year basis,
Speaker 2: remains about three percent. And even the so called core inflation,
Speaker 2: which is inflation excluding food and energy prices, it's also
Speaker 2: about two percent. So we talk about the last decades,
Speaker 2: we talk about Japan in deflation mode for many decades.
Speaker 2: Now they're getting two to three percent inflation. So now
Speaker 2: is the best window for them to normalize policy, which
Speaker 2: is why we think they're going to keep hiking rates
Speaker 2: at least till policy rates reach one percent. And more importantly,
Speaker 2: they're going to keep doing quilty so quantitative tightening by
Speaker 2: slowing their purchase of the jgbs. We know jgb's have
Speaker 2: been a hot topic these days because of the yields,
Speaker 2: especially in the longer end yells has risen quite a lot.
Speaker 2: But if you look at what the Bank of Japan
Speaker 2: has said, not the government, the Bank of Japan, they
Speaker 2: are not really concerned. They said they will keep doing QT,
Speaker 2: maybe with a little bit of a tweak, but the
Speaker 2: direction will be the same. That tells you how committed
Speaker 2: they are in terms of walking away from the JGB market,
Speaker 2: because one problem or one development over the decades is
Speaker 2: that BOJ now owns over half of the JGB market
Speaker 2: and going forward that's not healthy. If they want to
Speaker 2: have a healthier private investor driven JGB market, kind of
Speaker 2: like the US Treasury, then they will have to lower
Speaker 2: their dominance in the JGB market. And now, as we said,
Speaker 2: it's really the best window for them to normalize.
Speaker 1: So you see higher JGB yields going forward.
Speaker 2: Higher, so even steeper curve bear stripening we think is
Speaker 2: going to be the normal.
Speaker 1: Okay, now, Stephen, you're one of our most popular analysts
Speaker 1: that Bloomberg Intelligence. You always have been, but recently, you know,
Speaker 1: there's been even more interesting in e fics currencies. You
Speaker 1: and I have been on overseas trips recently. What are
Speaker 1: clients worried about right now.
Speaker 2: Well, kind of like what you ask about the Taiwan dollar. Well,
Speaker 2: of course we talk to Taiwanese clients. We talked too
Speaker 2: many clients, and most of them they're concerned about a
Speaker 2: very strong local currency. Because we mentioned about exporters in particular,
Speaker 2: and livers and a lot of the other investors, they
Speaker 2: have a lot of dollar exposure, whether their trades are
Speaker 2: denominated in the dollars or they have a lot of
Speaker 2: dollar assets. So now we're really talking about US crisis
Speaker 2: in the making in terms of dollar assets. When we
Speaker 2: talk about the Asian financial crisis many many years ago,
Speaker 2: it's always about dollar liabilities because of FX mismatch. The
Speaker 2: risk was on the Asian economies back then, But now
Speaker 2: the risk really lies with the US because it's a
Speaker 2: dollar asset crisis. And yeah, as you said, we have
Speaker 2: a lot of questions this year, and that's why we
Speaker 2: are cading it, at least internally the year of the EFFCS.
Speaker 2: Of course, we know EFX matters every day every year,
Speaker 2: but going forward for the next year, for the next
Speaker 2: few years, in the next decade, we think effects will
Speaker 2: be increasingly important given what happened to the US dollar, and.
Speaker 1: This is particularly worrisome for a lot of especially North
Speaker 1: Asian companies and countries, because they rely on exports.
Speaker 2: Yes, I mean like because we are really one of
Speaker 2: the major funders of the US deficit over the years.
Speaker 2: Of course, novice Asian economies especially has been accused of
Speaker 2: undervaluing their currency, which is why the US administration always
Speaker 2: goes after say South Korea for example. But however, the
Speaker 2: fact is that we do fund their deficit. So at
Speaker 2: the end of the day, we are the savers with
Speaker 2: the current accountcor plus player. So now the risk is
Speaker 2: really on us to sort of manage a soft lending
Speaker 2: so to speak, for this dollar weakness.
Speaker 1: Okay, so Stephen, before I let you go, like you've
Speaker 1: already sort of hinted about some of these currencies. But
Speaker 1: in your story of Asian currencies appreciating, do you have
Speaker 1: like one of two favorites of the next say, six
Speaker 1: to twelve months.
Speaker 2: Yeah, if you ask me, Because the largest risk of
Speaker 2: appreciation that the central bank will find it hard to oppose,
Speaker 2: it's really Taiwan. So if you ask me, twan dollar
Speaker 2: will always be there in your little bit of course,
Speaker 2: one reason being like in my view, it's not going
Speaker 2: to operate from over the next three to foremanths is
Speaker 2: that central banks will try their best to control to
Speaker 2: contain the appreciation, so therefore the proxy currencies will be
Speaker 2: my favorite. I mentioned a little bit earlier, so South
Speaker 2: Koreina one type out and Malaysian ring kits are probably
Speaker 2: the ones that I like the most, being a Talwan
Speaker 2: dollar proxy and also from their own perspective, we think
Speaker 2: they could appreciate as well.
Speaker 1: Steven, I think that's a great way to finish the show.
Speaker 1: Thanks again for coming on the Asia Centric Podcast.
Speaker 2: Thanks for having me.
Speaker 1: You've been listening to the Asia Centric Podcast from Bloomberg Intelligence.
Speaker 1: I'm John Lee in Hong Kong. You can find all
Speaker 1: our episodes on Apple Podcasts, Spotify or where you listen
Speaker 1: and this podcast was also produced and edited by Clara Chen.
Speaker 1: Thanks for listening and see you next week.