In this week's letter, we look at a few more macroeconomic themes relating to Asia. We first analyse recent Asian currency performance, noting the Japanese yen’s weakness and the Indian rupee’s relative resilience in the face of a strengthening US dollar. We then examine the explanatory power of yield differentials for the respective performance of these currencies. We find that while yield differentials explain about half of the currencies’ returns variability, much remained unaccounted for, particularly in the case of the yen.
We move next to study more localized issues within specific Asian economies. Starting with Japan, we discuss the recent slowdown in the growth of its monetary base and in its central bank’s government bond holdings in light of monetary policy moves. We also examine Japan’s latest Tankan survey results, which indicate diminished large manufacturer optimism, but elevated sentiment amongst large non-manufacturers. Moving to China, we take stock of developments in its electric vehicle market and investigate possible drivers of its recent sales slump, including seasonality and increased competition. Lastly, we explore South Korea’s latest exports numbers in the context of its broader relevance for global trade. We find that while headline export growth remains positive, underlying weakness exists when semiconductors – a major export component – is removed.
Asian FX performance The US dollar has been on the front foot lately, with its strength spurred in part by some unwinding of Fed rate cut expectations. The strengthening has come to the detriment of Asian currencies, which have weakened on average by 3.5% against the dollar so far this year (Chart 1). The extent of Asian currency depreciation against the dollar has been varied, however, with the Japanese yen having weakened the most, while the Indian rupee has displayed relative resilience.