Asian currencies have registered broad gains since the start of the year on the back of the U.S./China phase one trade deal, as well as signs of improvement in the manufacturing and electronics sectors. However, the coronavirus threat is sparking contagion risks that have started to weigh on Asian currencies.
Since the close of January 17, CNY and CNH have declined over 0.7% against the USD as reports of virus spreading in parts of China emerged and human-to-human transmission was confirmed. We expect a weaker Lunar New Year (LNY) season with impact on retail sales and tourism in Q1. This could explain some further weakness in the Chinese currencies and policy easing will likely be strengthened.
Given the crucial timing of the LNY when Chinese tourism peaks, contagion risks are at their worst. Hong Kong sees an average of four million Chinese tourists monthly, and is on high alert given the memories of SARS in 2002-03. Thailand, Japan, South Korea, Singapore and Malaysia also see an influx of Chinese tourist round the year, peaking generally around the LNY.
MYR has seen declines of about 0.6% against the USD since January 17, reversing most of the gains it saw since the start of the year. KRW has extended its loss to 0.8% against the USD despite a strong Q4 GDP.
However, we believe the preparedness levels across Asian countries to be much better this time compared to the outbreak of SARS. China’s transparency about the spread of the virus, as well as efforts to contain the disease in Wuhan, are also helping. This should help contain the weakness in Asian currencies.
Figure 1: Visitor Arrivals from China to Asian Countries (000's)