East Asia trudging through the trade war trenches
East Asia’s big export-dependent economies have been hit by softening global demand, trade disputes, and China’s own domestic slowdown. As China, Japan, and South Korea each feel the impact in a different way, the outlook for each country also varies. The developments in the region will have important implications for companies in almost any area of manufacturing — especially technology — so having a solid fundamental baseline to work in forward-planning is critical.
Our data-driven models tell us we should expect a pretty different change in the trajectories for currencies in the region over the next few months. This spring we began predicting China’s yuan would weaken past 7 to the dollar. Now that it has, though, we believe the current wave of depreciation is over and the yuan should be relatively stable through the end of the year, though short-term fluctuations will happen.
That stability is due in large part to China’s closed capital account, but the fact that the financial system has held up despite the economic slowdown has also helped sentiment.
Chinese stocks could also see modest gains in the fourth quarter as government stimulus works its way through the economy and consumers continue to be a stabilizing force amidst a trade war with the US.
The Japanese yen, on the other hand, may be due for some mild depreciation against the dollar through the end of the year after strengthening since April. The Bank of Japan stands ready to pump funds into the economy, though the controversial sales tax increase that went into effect October 1 will only add to the difficulties of maintaining even the slow growth rates in the country.
South Korea, meanwhile, is in a challenging spot, as a trade dispute with Japan only adds to the country’s woes, which mostly stem from weak exports numbers due to South Korea’s heavy reliance on trade with China.
The Korean won could also weaken significantly through December, with expectations high that the Bank of Korea will cut interest rates this year to deal with a weaker economy and the country’s first-ever bout of deflation.
The situation could change quickly if a trade deal is reached between the US and China, or if Japan and South Korea settle their dispute, but for now, trade friction is fait accompli in the region.