Indian shares gave up early gains on Monday and the Indian rupee opened weaker by 21 paise against the dollar, as renminbi resumed its downward slide and investors looked ahead to the upcoming earning season to gauge the initial effects of demonetization.
The rupee again broke below the 68-mark by depreciating 24 paise to trade at 68.20 against the dollar in early trade at the Interbank Foreign Exchange, due to increased demand for the American unit from importers and banks.
The rupee had closed steady at 67.96 against the US dollar on Friday amid renewed selling in the domestic equity against the backdrop of sustained capital outflows.
India and China are not the only currencies under pressure. Emerging Asian currencies this year are set to extend their fall from 2016, as expectations of faster rate hikes from the Federal Reserve and U.S. President-elect Donald Trump’s promise of fiscal stimulus push the dollar higher, a Reuters poll showed.
Leading the losses will likely be the Chinese yuan, which slumped around 6.6% in 2016 and was one of the main reasons for financial market volatility, despite Beijing supporting it by burning through reserves to offset the impact of outflows.
These broad conclusions from the views of many dozens of foreign exchange strategists took into consideration a dramatic 1% appreciation in Beijing’s partly-managed currency in the first trading days of the year.
On Friday, the People’s Bank of China sharply raised the midpoint for the yuan by 0.9% to 6.8668 per dollar, the biggest daily hike since removing a dollar peg more than a decade ago, in yet another attempt to thwart a steady fall in the currency.
“What happens in the U.S. this year, whether it is the Fed’s rate hikes or Trump’s fiscal policies, will drive Asian currencies through the dollar and we are forecasting another year of depreciation across the board,” said Khoon Goh at ANZ, who was the most accurate forecaster of Asian foreign exchange rates in Reuters polls in 2016.
“But some high-yielding economies with stronger fundamentals such as India and Indonesia are in a better position to weather those setbacks, compared to South Korea and Taiwan where the follow through from China will be felt much more.”
While upcoming economic data from China are expected to show it entered 2017 on a solid footing, the fact that it has come on the back of renewed aggressive government spending has raised concerns of an eventual slowdown and continued capital flight.
Adding to those risks are Trump’s promises to brand China a currency manipulator and impose heavy tariffs on Chinese goods, both of which could further escalate tensions between the two top economies.
Fed policymakers have already begun factoring in assumptions of greater fiscal stimulus, and consequently higher growth, into their forecasts, minutes from its December meeting showed this week, suggesting rates could rise faster than the three moves predicted by them now.
That is likely to propel U.S. bond yields and the dollar higher, in turn denting currencies around the world.
With growth slowing down in several Asian economies from China to India to Indonesia over the past few years, the path of their currencies going forward will probably be a major factor affecting the course of regional economies.