v 2014 was a positive year for US dollar - its best annual gains in the last 6 years. Strengthening of the currency was particularly visible since mid-September 2014 as the European Central Bank (ECB) and the Bank of Japan (BoJ) seeking to fight deflation. Geopolitics has played its part as well.
v Most Asian ex-Japan currencies appreciated against the US dollar in first half of the year before giving way to broad-based USD gains and to accelerated Japanese yen declines especially Northeast Asian currencies. Ringgit Malaysia took a severe beating to be worst performing Asian-ex Japan currencies in 2014.
v We argue that US dollar will have plenty of room to the upside and to repeat its feat being the best performing currency for two consecutive years like 2000/01 and the case of consecutive three years in 1983.
v Euro will be the weakest among G10 currencies on quantitative easing and political concern while the rate of Japanese Yen’s depreciation to ease. Abe is wary that further depreciation will hurt household and small firms as well as hurdles to further monetary policy easing will be higher.
v Polarization of Asian currencies will likely to intensify with Northeast Asian currencies to be underperforming against its peers due to relatively high overlapping against Japan’s export.
v Sell down of Ringgit Malaysia is overdone but sentiments are unlikely to improve at least in 1H2015. Our stress test leads us to assign low probability for Ringgit Malaysia to trade beyond RM3.70 against the US dollar.
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