Asian currencies still on the straight and narrow

Non-Japan Asia (NJA) currencies have weakened in the past four weeks, led by sharp falls in the INR, THB and IDR (Figure 1). Rising oil prices and tepid exports are amongst the common factors behind this currency weakness.

But precedent suggests that outside of periods of major financial shocks, these bouts of currency depreciation are reasonably shallow and short-lived and typically followed by similarly shallow and short-lived bouts of currency appreciation (Figure 2). It’s a similar picture for the CNY (Figure 3).

This pattern of mean-reversion reflects in part the ebbs and flows of foreign FX flows and seasonality of current account flows. Importantly, it also reflects NJA central banks’ willingness and ability to smooth the path of their currencies via FX (and verbal) intervention. They have to balance the competitiveness of their currencies and large export sectors on the one hand with imported inflation and the cost of servicing foreign-currency denominated debt on the other.

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