What are the implications of Asian currency weakness for cash investors?
Asia-Pacific currencies have weakened significantly over the past few months, culminating in the Chinese renminbi breaching the psychologically important seven per US dollar level on 7 August. The Australian dollar has also hit a decade low against the US dollar at 0.6756, the Hong Kong dollar moved to the weaker end of its trading band against the US dollar at 7.8464, and even the safe haven Singapore dollar hit a nine-month low against the US dollar at 1.3847.
The definition of cash, while ostensibly straightforward – banknotes and coins – becomes increasingly challenging when the demands for higher returns counteracts the obligation to ensure adequate liquidity and the commitment to avoid losses.
The market mood has changed dramatically over the last six months. The risk-off sentiment that dominated in late 2018 has very much been replaced by a risk-on attitude in 2019, mainly in response to the recent dovish shift in Federal Reserve policy.
Singapore’s de facto central bank, the Monetary Authority of Singapore (MAS), will hold its semi-annual monetary policy meeting in mid-April. Given the recent rapid changes in the global and regional economic outlook, market consensus for future policy direction remains divergent – but both the MAS’s actions and words could have significant implications for Singapore dollar cash investors.
After a decade of anaemic returns, cash rates moved decisively higher in 2018 – at least in the US. Three-month Treasury yields pushed through the 2% mark, while dollar money market yields actually rose above the yield available from many broader fixed income benchmarks.