Currency blocs fall into place Asian policies suggest regional union

By Andrew Wood in Hong Kong

Published: November 22 2007 03:05 Last updated: November 22 2007 03:05

Asian central banks appear to be adopting similar monetary policies in a way that suggests they could be preparing for an eventual currency union for the region, according to Deutsche Bank.

Twelve Asia-Pacific currencies – including the yen, the Korean won, the Indian rupee and the Australian dollar – have increasingly traded as a bloc since 2005, the bank’s research has found.
There is an increase in the correlation between the value of Asian currencies as central banks try to keep their export-led economies competitive internationally and also reduce foreign exchange volatility within the region.

This trend is a result of the wider use of trade-weighted currency baskets in India, China, Singapore and Malaysia, the bank says, adding that the patterns show similarities to movements in some European Union currencies in the years before the euro was created in 1999.

“Asia is beginning to look a lot like Europe in the 1980s and the start of the 1990s,” said Martin Hohensee, Asian head of fixed income and credit research, who led the analysis.

“Policymakers and politicians are talking seriously about the possibility of Asian currency union, even if there isn’t a single currency,” he told the Financial Times in an interview.

Asia has a thickening network of free-trade agreements, creating conditions similar to Europe’s single market that paved the way for the euro. “Intraregional trade within Asia accounts for a similar share of total trade as was the case in Europe in 1992,” he said. The Asian Development bank has outlined plans for a possible Asian Currency Unit, similar to the European Currency Unit that preceded the euro.

But Mr Hohensee said that, unlike in Europe, there is much less political will for integration. Nevertheless, this week leaders of the 10 members of the Association of South-east Asian Nations agreed to remove trade barriers by 2015 to create a European Union-style economic community.

“What seems to be happening in Asia is an economic process that might become a political one,” Mr Hohensee said.

He did not think Asian central banks were deliberately colluding in setting monetary policy, but that informal co-operation would grow naturally. “I think every time central banks get together and talk they realise that volatility is in no one’s interest,” he said.

Deutsche Bank says the trend offers investors the chance to use similar strategies to those popular in the run-up to the euro, by betting that interest rates for high-yielding currencies will converge to the regional average. “This informal kind of monetary union by stealth is throwing up good investment opportunities,” Mr Hohensee said.

The bank is launching two Asian Convergence indices to track the trend. One is based on the nine non-Japanese regional currencies most likely to take part in any Asian currency union, and another broader index which includes the yen and the Australian dollar, as both countries are likely to be affected by any Asian regional currency policy.

Patterns begin to emerge

The chart shows the correlation between individual Asian currencies against the dollar and a basket of those currencies from 2000.

Of the 10 currencies measured by Deutsche Bank, eight have shown increased correlations since 2005 than the previous five years. Five have shown correlations of greater than 90 per cent since 2005: the Chinese renminbi, the Malaysian ringgit, the Philippine peso, the Singapore dollar (which has jumped from 10 per cent since 2005) and the Thai baht. The yen and the Taiwan dollar’s correlation to other currencies have turned negative since 2005, however.

Copyright The Financial Times Limited 2007

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