A Currency to Bring 'Em All Together?

A new index has just been launched by Deutsche Bank, betting on the fact that Asian currencies are becoming more and more correlated.

Touted to be the first such index in the market, what is interesting is it's an informal reflection of market forces, not government intervention.

In a way, it seems to be just a different twist on the same story.

For years, politicians and policymakers have been talking about the formation of the Asian Currency Unit (ACU) to help develop regional bond markets and promote monetary co-operation. But its creation has been hampered by many birth pangs such as which currency to include or what weights each country's currency should have.

For instance, China has opposed the inclusion of currencies such as the New Taiwan and Hong Kong dollars in the currency index. But financial markets have complained that exclusion of such currencies would make the ACU meaningless.

Haruhiko Kuroda, the Asian Development Bank’s Japanese president and a strong proponent of a monetary union, sought to circumvent the complications of forging this endeavour in an FT article last year.

“This is not an official kind of currency unit like the Ecu...It would just be an indicator of exchange rates, with no exchange market intervention and no settlement involved.”

But to some extent, isn't the market already doing that to the currencies?

In its research accompanying the index launch, Deutsche Bank points out that these currencies already move together. This is because central banks try to keep their export-led economies competitive and reduce the foreign exchange volatility within the region.

It says that the trend offers investors an opportunity to use similar strategies to those popular in the run-up to the euro - betting that interest rates for high-yielding currencies will converge to the regional average.

In the FT article, Martin Hohensee, the bank's Asian head of fixed income and credit research, said:

“Policymakers and politicians are talking seriously about the possibility of Asian currency union, even if there isn’t a single currency.”

Honestly, I doubt if the efforts to pull off this single currency will pay off. Nothing really seems to happen except more talk.

So perhaps instead of pulling teeth trying to forge a common currency, let market forces dictate. The outcomes might be more similar than you think.