Donald Trump’s unexpected success in the US presidential election has brought on a period of heightened currency volatility and economic uncertainty across Asia, as global money markets speculate on the new economic policies that a new US administration may introduce after it takes office in January 2017.
Currencies across Asia have fallen sharply against the US dollar this month, with the US Federal Reserve is widely expected to begin along-anticipated interest rate tightening cycle in December. The US dollar has also strengthened on expectations that future economic policy in the US will be more focused on domestic growth – perhaps at the expense of trade with Asia.
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The Japanese yen is down by more than most against the US dollar this month, by close to 8%, followed by the Malaysian ringgit with a 6% drop and the Indonesian rupiah and South Korean won each with a 4% decline. The Thai baht was one of the most resilient among Asia’s fully-convertible currencies, with a decline of just 2% month-to-date.
The effect on the region’s automotive markets is expected to be more muted than these sharp currency swings would suggest, however, particularly as very few vehicles and components are actually imported from the USA.
Vehicles and components sold in Asia are mostly sourced from within the region – and more often than not from domestic factories. In South-east Asia, the vehicle marketsare highly dependent on domestic production and on imports from Thailand, Japan and Indonesia.This will limit the direct impact of the US dollar appreciationon production costs and ultimately on vehicle prices in the short term.
Some vehicles, particularly at the luxury-end of the market, are sourced from Europe, but the euro and the British pound are also down sharply against the US dollar this year, so the impact is not expected to be significant in Asia.
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By GlobalDataOverall, vehicle manufacturers tend to pass on their increased costs very gradually to consumers to minimize market disruption and they tend to hedge their for currency swings a year in advance.
Commodity prices are largely priced in US dollars, however, and these do have a direct impact on input costs.
While many Asian currencies this month have dropped to lows against the US dollar not seen since the 2008 financial crisis, including the Philippine peso, Thai baht, the Malaysia ringgit and Indonesian rupiah, many have been on a down-trend for the last three years.
Central banks in the region have cut interest rates in the last few years to help underpin domestic economic growth, while low oil and other commodity prices have helped keep inflation in check. A reversal of this cycle could mean higher interest rates – which inevitably will hold back economic growth in the region.
Most consumers buy their vehicles on credit these days, so higher interest rates will have a significant impact on purchasing ability.Weakening currencies and rising inflation also affects consumer sentiment, as well as spending power.
Economic headwinds seem to be building up in the region and more and more vehicle markets appear to be slowing down. While the direct effect of currency devaluations may be limited, uncertainty appears to be growing.
