This article first appeared in The Edge Financial Daily on January 4, 2018

KUALA LUMPUR: Asia-based exporters are advised to at least partially hedge their upcoming US dollar proceeds, “no matter how unfavourable the current exchange rate is”, as the greenback is expected to continue weakening, says UOB Global Economics and Markets Research.

“For Asia-based exporters, this is a painful start to the year due to the strength of Asian currencies,” the research house said in a foreign exchange (forex) strategy note yesterday.

In contrast, Asia-based importers can afford to take a wait-and-see approach to see how low the US dollar trades before committing to US dollar-denominated purchases, said UOB head of markets strategy Heng Koon How and forex strategist Peter Chia.

“The pace at which the US dollar weakens has indeed been faster than we anticipated,” said the pair, who had anticipated an environment of a weak greenback in 2018, driven by various drivers for a stronger euro, stronger commodities-related currencies like the ringgit and Australian dollar, and stronger Asian currencies.

Nevertheless, they think it is premature to update the point forecasts in their Quarterly Global Outlook Q12018, though they maintained that the drivers for a weaker US dollar “remain entrenched”.

“Three key negative drivers reinforce US dollar weakness as we start 2018. These are global monetary policy convergence as other central banks play catch-up with the Fed (US Federal Reserve) in terms of normalising policy, a US tax reform that is of little help to the US dollar and ongoing flattening of the US yield curve,” they said.

In Asia, they said various Asian central banks are on track to join the Fed in hiking rates. “We forecast that the People’s Bank of China (PBoC), Bank of Korea (BoK) and Bank Negara Malaysia (BNM) will deliver at least a 25bps (basis points) rate hike each in the first half, with possibly BNM front-loading their rate hike,” the duo added.

On the US tax reform, the duo noted there was a lot of hope “incorrectly placed on the potential that repatriation of offshore retained earnings by US corporates will rejuvenate the US dollar”. But it’s now clear that not only is the bulk of offshore retained earnings already in US dollars, most US corporates are rather cash-rich now and have little incentive to repatriate their offshore retained earnings, they said.

Meanwhile, a lack of clear evidence that inflation may pick up in the US has resulted in a flattening US yield curve, with the yield for 10-year US Treasuries stuck at 2.4% over the past year, they noted. “This ongoing flattening of the yield curve weighs down on the US dollar and is seen as a lack of conviction by the market on inflation expectations,” they added.