[SINGAPORE] South-east Asia has long caught a cold when the US dollar sneezes, but these days, currency watchers are just as alert to the renminbi’s sniffles.
China’s renminbi is shaping up to be a barometer for the region’s currency swings as analysts point to deepening trade ties with China, US President Donald Trump’s volley of tariffs, and growing spillover effects from Beijing’s policy moves – all unfolding against a backdrop of weakening US dollar dominance.
While the greenback and renminbi have long played outsized roles in determining Asian foreign exchange movements, MUFG Bank’s senior currency analyst Michael Wan noted that even more domestic-oriented economies, such as Indonesia, are now reacting more visibly to the shifts in the renminbi – joining the ranks of traditionally sensitive currencies such as the Malaysian ringgit.
Relative to Japan’s yen, correlations between Asean currencies and the renminbi are at the strongest since 2020, said Maybank head of foreign exchange research Saktiandi Supaat.
A NEWSLETTER FOR YOU
Friday, 8.30 am
Asean Business
Business insights centering on South-east Asia’s fast-growing economies.
He added: “The People’s Bank of China’s (PBOC) persistence in keeping the (renminbi) supported in Q4 2024 likely anchored regional currencies, and could remain an anchor should the trade war escalate this quarter, as long as the (renminbi) support remains.”
At the renminbi’s mercy
On Tuesday (Apr 8), the Chinese central bank set its daily reference rate at 7.2038 yuan to the US dollar – the weakest since September 2023 and past the psychologically key 7.2 threshold.
China’s offshore currency fell more than 1 per cent to as low as 7.4287 per US dollar on Wednesday at 4.48 am, before Trump’s tariff of 104 per cent on Chinese goods took effect at noon.
As at 7 pm on Wednesday, it was trading at around 7.38 to the US dollar before weakening immediately after China’s announcement that it would raise the tariff on US goods to 84 per cent, effective Thursday.
Economists across the board expect the renminbi’s depreciation to persist and weigh on regional currencies.
“With the trade situation looking to stay tense, we see the possibility that (USD/offshore renminbi) may keep creeping up,” said Saktiandi. “Resultantly, other USD/Asian pairs are also at risk of moving up.”
He noted that South-east Asian currencies linked to trade – including the baht, the Singapore dollar and the ringgit – took a hit given their sensitivity to the Chinese currency. This suggests that it is no longer just the almighty greenback – or even the yen – setting the pace in South-east Asia.
Compared to the start of April, the Thai baht has fallen some 2.2 per cent as at Wednesday night. The decline was followed by that of the Vietnamese dong at about 1.9 per cent; the Indonesian rupiah at around 1.6 per cent; the Malaysian ringgit at some 1.4 per cent; the Singapore dollar at about 0.5 per cent; and the Philippine peso at around 0.4 per cent.
Against its regional peers, the Philippine currency has been holding up well. It has a lower trade exposure, and could benefit from a softer US dollar, said Saktiandi. However, he noted that the prevailing risk-off sentiment could still negatively impact emerging market appetite and weigh on the peso.
Parisha Saimbi, a foreign exchange and markets strategist for Asian emerging markets at BNP Paribas, said: “It is still unclear whether the PBOC will defend USD/RMB at around the 7.35 to 7.37 level, or permit a rise to 7.5 to offset the tariff impact, but the currency has weakened against the basket – mainly the euro and the yen – and we expect this to continue.”
She believes that South-east Asian currencies would likely weaken against their global peers as central banks deliver further rate cuts, in light of the risk-off sentiment, as well as to offset tariff implications and spillover effects from a weaker renminbi.
Currency trajectory
In the near term, Maybank expects the renminbi to remain “somewhat bid”, pending negotiations and possible extended retaliatory measures.
The house’s medium-term view is for the Chinese currency to fall in the next few quarters as US growth continues to slow and the Federal Reserve eases monetary policy further.
“China has already acted to cushion growth with fiscal stimulus measures, and its readiness to add more could mean that the (renminbi) may not even take much of a hit from the interest-rates differential perspective,” said Saktiandi.
MUFG Bank’s Wan expressed similar sentiments, noting that while South-east Asian currencies have been helped by a relatively stable renminbi so far, this will likely change over the next three months at least. This is due to sharper-than-expected tariff hikes – especially on countries such as Vietnam – and uncertainty over the final tariff levels for China.
“We don’t think Asian currencies have reached the bottom yet,” added the bank’s senior currency analyst, Lloyd Chan. “The risk of a global full-blown trade war has risen significantly following China’s 34 per cent retaliatory tariffs, and there could be more from US trade partners ahead.”
But in the second half of the year, some pressure on regional currencies could be relieved, said Wan.
He explained: “A possible US recession will also compound the challenges for South-east Asian currencies, but our best forecast at this stage is that the dollar will weaken in H2 2025 as the Fed cuts and investors increasingly call into question US exceptionalism.”
S&P Global Ratings economist Vishrut Rana noted: “We expect some renminbi weakening on ongoing trade frictions and elevated US interest rates, but project modest strengthening after 2026.”
