Expect kyat to depreciate over the next two years: Fitch

The Myanmar kyat could weaken in the coming quarters as a result of renewed trade tensions between the US and China and resistance against pressure to slash interest rates by the Federal Reserve.

According to forecasts released by Fitch Solutions Macro Research this month, the kyat is expected to weaken to K1600 per US dollar by the end of the year and K1664 by the end of 2020.

While the local currency has stabilised at around K1520 per dollar so far this year, this has largely been supported by “benign external conditions, including the fading of the US dollar bull run and a perceived easing of trade tension between the US and China,” the UK-based research firm noted in an August report.

But those conditions are rapidly changing. Just last week, on August 23, China announced it would impose additional retaliatory tariffs against US$75 billion worth of US imports, adding an extra 10pc on top of existing tariffs, which were imposed earlier in the month.

That same day, the US said it would raise all current tariffs from 25pc to 30pc, and for tariffs scheduled in September and December to be 15pc instead of 10pc. The tension and uncertainty has strengthened the dollar, which is seen by businesses and investors to be a safe haven currency.

Also on August 23, Fed chair Jerome Powell told economists and central bankers that the Fed would act “appropriately” in response to trade tensions and slowing global growth. His remarks have widely been interpreted as suggesting that further rate cuts, while likely, will not be at levels demanded by Donald Trump. The US President had repeatedly called on Powell to lower interest rates by a full percentage point from 2-2.25 percent currently. Last month, the Fed cut rates by just a quarter of a percentage point.

Jeffrey Lamoureux, Head of Americas Country Risk at Fitch Solutions, said the Fed’s stance is supportive of a stronger dollar against the kyat. “To the extent that the US dollar has strengthened as markets adjust to comparatively less dovish Fed policy than previously expected, that supports our view that the kyat will weaken over the coming quarters. Additionally, rising trade tensions in the region – both between US and China and Japan and South Korea – will push capital toward safe haven assets,” he said.

Fitch Solutionsis also expecting the kyat to gradually depreciate in the coming years due to the country’s rising inflation and weak fundamentals. “The government’s efforts to liberalise the economy over recent years have allowed it to run wider fiscal and current account deficits financed by foreign capital. While this has boosted growth, it has also generated increased demand for hard currencies to finance imports and made the [kyat] more vulnerable to shifts in the global economy,” it said in its report.

Source: Myanmar Times

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