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Foreign Exchange

Asian currencies gravitating to Rmb fixing, says HSBC

Regional currencies appear to be moving to the ebb and flow of the daily fixing rate of the Chinese renminbi versus the US dollar, analysts at HSBC believe. Such signals could indicate the potential for the renminbi as a reserve currency.

Movements made by Asian currencies in the last six months appear less driven by the euro and more so the Chinese renminbi fixing against the US dollar, according to preliminary HSBC research.

Asian foreign exchange (FX) traders have often looked at the movement of the euro as a marker for the behaviour of a number of Asian currencies, as they have traditionally moved in the same direction.

"Whilst this relationship remains, the daily fix of the Chinese yuan [renminbi] has become an increasingly important point of gravity for near-term Asian currency performance—a testament to the growing importance of China as an economic power and a result of increased volatility in these fixings," wrote Perry Kojodjojo, FX strategist at HSBC in a June 1 report.

HSBC believes as the renminbi continues to internationalise and gains more stature, it will act as a regional anchor for Asian currencies.

The UK headquartered bank conducted a test to see what Asian currencies moved in the same directions the euro between 2005 and 2010.

When the euro appreciated or depreciated by more than 0.6% in a day, Asian currencies apart from the renminbi moved in the same direction, regardless of where the renminbi was fixed.

But data from 2011 onwards seems to indicate Asian currencies are being affected more by the renminbi’s daily rate.

"When the yuan appreciated on the fix by a large amount Asia’s reaction was positive in most cases, and strongly so even when the euro depreciated....it is clear [the euro] is having less influence, while China’s has grown," Kojodjojo said.

According to HSBC data, the Indonesia rupiah, Malaysian ringgit, and the Singapore dollar, are notable currencies with an historical attraction towards the euro. This appears to be less the case now.

"With China internationalising the renminbi at quite a fast pace, it would not surprise us to see Asian currencies continue to gravitate towards the renminbi and the rising influence it will exert on the this region and the wider world," Kojodjojo concluded.

HSBC believes that if the renminbi continues to demonstrate its influence over other regional currencies, it could help prop up its case to be considered as a reserve currency for central banks.

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