Today’s Currency Outlook from Morgan Stanley "reiterates our call that USD/Asia will show a definitive downtrend in 2006."
Why? "The Fed is not yet done with its tightening campaign and could help support the dollar, particularly against the JPY. However, as the global recovery matures and broadens, we believe Asia will be a major beneficiary. The Fed and USD/JPY may temporarily disrupt this downtrend, but will not prevent or reverse it."
The report highlights several points:
Point 1. CNY and JPY are the two remaining structural tension points in the currency space, as they are undervalued.
Point 2. Global growth is very robust.
Point 3. The official reserves of several countries in Asia have reached or are approaching ‘saturation’ levels.
Point 4. Currency politics from the US are heating up.
Point 5. China likely to be ready to impart more currency variability in USD/CNY.
Lastly, the Fed and USD/JPY Will Disturb, Not Reverse this Trend
Bottom Line: "We continue to believe USD/Asia should show a distinct downtrend this year. Robust global growth, mispriced JPY and CNY, saturating official reserves, and currency politics are some of the drivers we see propelling the Asian currencies higher."
Note that I am not a currency trader (far from it) but I watch
currencies as part of my macro overview. I recall a little incident with USD and a certain Treasury Secretary causing a little commotion about 19 or so years ago . . .
Asian Currencies Poised to Appreciate in 2006
Stephen L. Jen and Luca Bindelli and Charles St-Arnaud (all in London)
Morgan Stanley Economic Research, Feb 20, 2006