BNY Mellon: Won for the Techies

BNY Mellon: Won for the Techies


By Neil Mellor, Senior Currency Strategist, BNY Mellon

By Neil Mellor, Senior Currency Strategist, BNY Mellon

Trade wars, Italian politics and Brexit drama have been overshadowed this week by some precipitous declines in global stock markets. Here we mull over what further equity weakness could mean for one currency in particular.

On Wednesday, we laid out the case for depreciation in the CNY beyond the psychologically-significant CNY 7 to the USD level. And clearly, Chinese markets have since been among the hardest hit by the Wall St led rout (before recovering today, the CSI 300 had fallen a cumulative 5.7%).

In itself this does not have direct implications for Chinese domestic fundamentals: corporates tap banks for finance, not equity, and neither consumer spending nor investment has shown any discernible relationship with Chinese stock prices in recent years.

However, in as far as falling stock prices are symptomatic of fears for USD funding, trade wars, varying political / geopolitical dramas across the globe and for China’s economy itself, then certainly, a continued weakness in equity markets would indirectly augur for a weaker CNY, with all the uncertainties that this may entail for emerging markets.

As for the CNY’s regional counterparts, back in September, we noted a clear distinction in currency performance vis-a-vis the CSI 300.

A 200-day rolling correlation showed that in their performances against the USD, the IDR, TWD, INR and KRW held by far the strongest associations with the CSI (correlations averaged between 89.5% and 93%).

But then, it is also intriguing to note that the KRW has been one of the worst performers in Asia since the start of the month (at -3.4% at its lows this week), during which time US stock weakness has been driven by the performance of tech.

South Korea is renowned as a tech giant after all, and as the St Louis Fed points out, it is now spending a larger share of GDP on R&D than the US and Japan.

Since the end of last month, the NASDAQ has fallen 8.7% (compared to -5.4% for the S&P 500), with the ‘FANG’s featuring prominently in these precipitous declines.

So, if tech were to lead the way lower for stock prices, would this bode particularly badly for the KRW?

A comparison with the collapse could be enlightening: certainly in 2000 South Korea’s status as a tech giant had yet to be attained, but it was well on the way: between 1996 and 2015, ‘South Korea’s R&D intensity grew 88.5%’.

Rebasing currency performance to September 1, 2000 – when the NASDAQ finally gave up the ghost – shows that the KRW did indeed underperform USD-Asia over subsequent months and had fallen 23% against the USD by the time the index enjoyed some stability in March 2001. This compares with -2 to -10% for the majority of the KRW’s regional counterparts.

Of course, the IDR’s performance alone (and the latest disasters to befall the Indonesian people) dispels any suggestion that single variables can simply encapsulate currency performance.

But equally, if tech weakness means that a “long overdue correction” were to turn into something more serious, there seems no obvious reason to doubt the KRW’s likely underperformance .