Asia Tea Time - Cup 36 ☕

This week, I cover the weakening US dollar, the loss aversion complex, and Binance.

Macro in Asia

Weaker US dollar helps Asian currencies rebound

Asia’s currencies got some reprieve as the US dollar, earlier this week, fell to its lowest level since mid-July.

The crucial US dollar and Japanese yen conversion fell back below the 150 mark, indicating a yen that was strengthening against the dollar.

Why it’s happening

• The US Federal Reserve (Fed) has been talking about staying put with its current interest rate, which is in the range of 5.25-5.5%. That caused the dollar to weaken.

• The thought that the Fed might hit the “pause” button on rate hikes, along with some weaker data for the US economy, has therefore led to a stronger rebound in Asian currencies.

• Asian currencies had a pretty horrid 2022, also suffering further in 2023, as regional central banks were not raising interest rates as fast as the Fed was. 

Why it matters

• The US is the world’s largest economy and has the reserve currency, meaning that when interest rates are high there, money flows back to take advantage of that yield.

• With Asian currencies, particularly the Japanese yen, hitting multi-year lows against the dollar as recently as October, the thought of US rate cuts could help sentiment for them.

What’s next?

• Watch the data related to the world’s two biggest economies – the US and China – as they both inevitably impact broader Asian currencies.

Tim’s Take 

Talking about whether the Fed will raise, pause or cut, is a stock market obsession at the moment.

It also has an impact on the currency world too, though, as Asian countries haven’t been impacted as badly by inflation as countries in Europe or the US.

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That matters because if inflation isn’t too high then central banks don’t tend to want to raise interest rates. In fact, in China, there’s deflation – which is one reason why the Chinese yuan is one of the worst-performing Asian currencies so far in 2023.

However, it recently rallied to a three-month high versus the US dollar on news of weaker economic data in the US.

With more relaxed monetary policy in Asia – i.e. their interest rates are lower relative to the US – the incentive is there for investors to move money to places that offer a higher yield on their money. 

That’s one reason for the selling of Asian currencies and purchasing of US dollars. Whether this weakness in Asian currencies continues will depend very much on the Federal Reserve’s direction on interest rates in 2024.

Tim's Money Tip of the Week

We all make mistakes and that’s particularly true when it comes to money and investing. Investing is a learning curve and it’s natural for mistakes to be made.

However, the worst thing you can do is make a harsh lesson turn into a reason not to invest. That’s because leaving our money in cash is, well, not ideal because of that little thing called “inflation”.

We all know about the loss aversion complex – the fact that losing money elicits twice as powerful an emotion than gaining it.

That’s because seeing your money evaporate tends to shape our investing behaviour. But we should ensure that it shapes it positively, instead of negatively.

Personally, I feel that making mistakes younger (when you have less to money to invest or “lose”) helps prepare you better to think about investing more long term and – hopefully – more sustainably.

So, the next time you do lose money on an investment, try to see the silver lining in what you learnt from the experience and what to watch out for when you put your money to work in future.  

Story of the Week

Another week, another crypto scandal. This time it was the turn of Binance’s founder – Changpeng “CZ” Zhao – to face charges in the US of money laundering and other various misdemeanours.

It wasn’t exactly a surprise to find out that the world’s largest cryptocurrency exchange, Binance, was responsible for helping launder money for various terrorist organisations.

The price the company and CZ have to pay? The founder has stepped down as CEO and the firm is on the hook for a US$4 billion fine. Whether that stops CZ from pursuing his next “project” remains to be seen.