Forex Comment Aug 06

Chinese yuan and Korean won star, gold continues to shine

As with China, given the pickup in domestic performance and export improvements, it looks entirely possible that Korea will avoid a full-year economic contraction

Chinese yuan and Korean won star, gold continues to shine
South Korean banknotes are seen in Seoul in this file photo by AFP.

(ATF) The Chinese and Korean currencies have outperformed regional and global competitors since late May and the reasons for such star performances are not difficult to come by: both nations have done a very fine job in coping with the Covid-19 pandemic and are clearly reaping the economic rewards.

China became the first major economy to report growth following the coronavirus attack when it reported a surprisingly strong 3.2% year-on-year GDP growth for the second quarter. With that, the IMF full-year forecast of just 1.2% growth looks way too pessimistic.

South Korea's economy contracted by 2.9% in the second quarter. The IMF projects full year 2020 growth at -1.2%. But as with China, given recent significant pickup in domestic economic performance and as well as improvements in the export sector, it looks entirely possible that Korea will avoid a full-year economic contraction.

According to the latest ("August") business survey by the Bank of Korea, recovery has become widespread. The headline index for manufacturing rose to 57 from 51 in July; the sub-index for exporters rose to 68 from 60.

Those numbers are as punchy as the latest Caixin/Markit PMI numbers released this past Monday.

All this contrasts massively with the US economy, which the IMF expects to contract by 5.9%, an estimate which well might prove too optimistic as the Covid-19 pandemic is continuing to make a strong comeback with new record deaths in California and overall new cases in the 60,000 range.

Currency exchange rates are relative numbers, ultimately reflecting economic strength and outlook. No surprise that the yuan and won were well up over the past two months while the US dollar registered another over two-year low today of 92.5210 on the dollar index (DXY) at 2pm HK time.

China's central bank set central parity for the yuan against the dollar at 6.9438 this morning. Currently (6:30pm) CNY trades at 6.9443, well up indeed from 7.1671 on May 27.

The Korean won stood at 1243.9100 against the US dollar on May 25. It closed today at 1183.6100, up 0.44% for the day.

And gold?

GC1, the generic first future, was at $1800 on July 16 and now is at $2070.20, up $21 (1.02%) for the day.

I expect it to continue its run. But if you're no friend of heavy metal, Chinese and Korean stocks will do just fine.