Currency jitters

With currency wars brewing, corporates in the region have grown more nervous about their currency exposures. An HSBC survey in the third quarter of importers and exporters in the region shows that currency exposure has become an overriding concern.

The slide of the US dollar, the currency in which most trades are denominated, means Asian exporters are receiving less for their goods, although in some cases the weaker dollar can translate into cheaper raw materials.

Of the Vietnamese traders polled by HSBC, 76% – a 26 percentage point (pp) jump from the previous quarter – viewed their foreign exchange (FX) risks as worrying, citing fears about the impact on trade growth and demand. In Hong Kong, mainland China and Australia, respectively 62%, 49% and 45% expressed concerns.

This was before the announcement of the US Federal Reserve during its September policy meeting which opened the door to a second round of quantitative easing (QE), compounding concerns over the direction of the US dollar.

Liz Ann Sonders, chief investment strategist at Charles Schwab, explains that when the US Federal Reserve purchases assets, it credits the account of the seller in electronic dollars, thereby “printing” money. By expanding the supply of money, the Fed is devaluing the dollar. “Although a weaker dollar will benefit US exports in the short term, it translates into higher commodity prices worldwide,” explains Sonders.

“Since exports represent a mere 12% of the US gross domestic product and consumer spending 70%, the hit the US consumers take by rising commodity prices could outweigh the benefits to US exporters,” says Sonders.

“While the US dollar slides, other countries are unwilling to sit idly by and allow their goods to become more expensive.”

Obstacles to smooth trade

Simon Constantinides, Asia-Pacific head of trade and supply chain at HSBC, feels it is only natural that entrepreneurs are preoccupied with inherent risks, such as FX and trade regulation. The focus on currencies will intensify in the coming months, as rhetoric on protectionism and unfair trade practices reach a crescendo – especially at the G20 summit meeting on November 11 in Seoul.

While at the time of the HSBC survey, monetary authorities in the region were holding the harness as far as an interest rate hike was concerned, in the fourth quarter China and Singapore changed tack and raised interest rates.

Constantinides notes that corporates face a multitude of issues which hinder the smooth and profitable flow of goods. He cites the lack of infrastructure in parts of Asia and the emerging world; the rise in the costs for shipping, logistics and storage; the squeezing of profit margins by demands for higher wages; and the higher factory operating costs in the region. Around the world, the survey reveals, the following factors were cited as cause for concern: (i) cost of shipping and logistics, by 40% of respondents in Saudi Arabia, 21pp more than in the previous quarter; (ii) insufficient profit margins by 37% of those in the UAE, a 16pp rise; and (iii) supplier risks related to meeting trade commitments by 24% in Germany, an 11pp rise and 14% in the US, a 6pp rise.

New global trade paradigm

As the US dollar declines further in value and a US economic recovery is not assured, corporates in the region are changing the way they conduct business. While the US dollar remains the undisputed trade settlement currency globally, more regional traders expect to settle larger volumes in renminbi in the next six months: 56% in Hong Kong, 49% in Malaysia and 24% in mainland China. Those exporters and importers who plan to use the renminbi as their primary currency in the next six months, made up 19% in Hong Kong, 17% in Singapore, 10% in Indonesia, 7% in Vietnam, 3% in Australia and 1% in India.

Trade between Greater China and Asia continues to perform robustly, notes Chris Lewis, HSBC head of trade and supply chain for Greater China, and the fast-paced developments in renminbi internationalization is creating a shift in the region with greater exports and import volumes expected to be settled in renminbi. Emerging markets continue to drive global trade confidence but developed markets are showing increased optimism, Constantinides points out, and the positive market means trade will remain a major driver of economic growth globally. The new global trade paradigm will be increasingly characterized by stronger prospects of emerging markets trading with each other and the developed world finding more opportunities to stimulate trade with the emerging world markets.

This was published in the December 2010 issue of The Asset