LONDON: For all the unease about local currency strength, emerging Asian policymakers may prove more tolerant of the phenomenon than might first appear, viewing it as an offset against signs of imported food inflation.
Yesterday’s slide in emerging Asian currencies, which some in markets ascribe to regional authorities wanting softer currencies against the falling yen, might end up being relatively short-lived.
While evidence of inflationary pressure in emerging Asia is not yet uniform, there are signs of a pick up in price pressures in some countries.
Food prices are on the rise in Bangladesh and China while in Singapore higher car prices have pushed up the rate of inflation.
In all cases, the main issue is that the price pressure is being caused by imported inflation, and that in turn can be partly counteracted by a strong local currency that would tend to make imports cheaper for domestic consumers.
China’s December inflation data is revealing.
China’s annual consumer inflation rate quickened to a seven-month high of 2.5 percent, with food inflation, estimated to account for around 30 percent of China’s CPI, at 4.2 percent year-on-year in December.
This is before any impact from Australia’s worst heatwave on record, which has been scorching the country’s grain belt.
That could cut the size of world No. 2 wheat exporter Australia’s crop and push grain prices higher, given that the United States is also still struggling with a drought.
Against this backdrop, emerging Asian policymakers, always conscious that rising food prices can translate into social unrest, may conclude that a strong currency is a bulwark against such inflationary pressures.
Local currency strength can also temper the inflationary impact of rising prices of imported fuel.
Global prices for liquefied natural gas (LNG) are rising toward record highs this year as increasing demand runs up against stuttering supply.
Countries such as China and India, which are more exposed to short-term LNG deals, are particularly vulnerable to the impact of higher gas prices.
Additionally, the oil price remains near a three-month high with Brent crude trading around $ 113 a barrel yesterday.
Strong currencies are a drag on export competitiveness, but if imported food price rises are coming, and fuel costs remain elevated, emerging Asia’s policymakers may yet have to recognize the advantage of some degree of local currency strength.
— Neal Kimberley is an FX market analyst for Reuters. The opinions expressed are his own.
