ASEAN currencies fell sharply in 2015. They’re probably going to fall more in 2016.
Investors spent most of 2015 waiting for the Federal Reserve, the U.S. central bank, to raise interest rates. When a country raises its interest rates, its currency becomes more attractive, in part because investors can earn more than before on their cash. So some global investors took their money out of ASEAN markets in anticipation of earning a higher fixed return in the U.S dollar.
Contrary to what most people think, rising interest rates in the U.S. don’t hurt stock market performance. But they do hurt currencies, as investors look for ways to earn a lower-risk return on their cash.
ASEAN currencies were also hurt by the ongoing economic slowdown in China. It’s the number one or number two export market for Malaysia, Thailand, Singapore, Indonesia, and Vietnam. When your largest trading partner is buying less of your products, demand for your currency falls. And that means the value of your currency falls. In 2015, as shown below, Vietnam’s dong declined 5%, the baht dropped 9%, and the ringgit fell 23%.
Other factors were also at work. The 30% drop in oil prices in 2015 hurt the ringgit, as petroleum products account for 20% of Malaysia’s exports. Indonesia’s rupiah fell 11% partly because of the decline in commodity prices, as the value of its exports fell along with the prices of oil, coal and palm oil.
Investors usually stay away from political uncertainty. Malaysia’s ongoing political scandal has made investors wary of investing in the country. In Thailand, terrorist bombings, the delayed re-transition to democracy, and continued concerns over the health of the country’s king helped push the baht down 9% against the U.S. dollar in 2015.
A slowdown in trade caused Singapore’s dollar to drop nearly 7% against the U.S. dollar. The Philippine peso, buoyed by high levels of remittances from overseas Filipinos sending cash back home, fell 5% during the year. The Hong Kong dollar, which is pegged to the U.S. dollar, barely moved in 2015.
The Vietnam dong has also proven to be more resilient than some other regional currencies, declining only 5% versus the U.S. dollar. This is partly due to the State Bank of Vietnam stepping in and buying or selling foreign currencies to keep the dong’s exchange rate stable.
What’s next? U.S. interest rates and China’s economic slowdown will continue to set the tone for the region. Commodity prices will continue to be important for the ringgit and the rupiah. The price of oil is probably close to a bottom. But political uncertainty will continue to weigh heavily in Thailand as well as in the Philippines, which will elect a new president in 2016.
Balance it all out, and it looks like it will be more of the same for ASEAN currencies in the coming year.