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Climate change targets to have unexpected impact on Asia FX

Climate change targets to have unexpected impact on Asia FX

The link between climate change and currencies may not be obvious.

But many Asian countries are both importers and exporters of fossil fuels, and commitments to reduce carbon emissions will have knock-on effects on their current accounts and therefore currency strength.

Fossil fuels create a sizable economic impression in countries where resource extraction and refining occur.

Impact on commodity currencies

For major exporters this will have a profound effect as the size and importance of the sector will be difficult to substitute, eroding the value of the national currency by reducing the surplus effect on the balance of payments, says Peter Rosenstreich, head of investment products at Swissquote.

“In contrast, renewable energy will positively impact countries in two distinct ways,” he says.

“Firstly, countries with a deep reliance on imported fossil fuels that shift to renewables will see the benefit of diminished external capital flows and reduced potential political entanglements.

“Secondly, countries with fragmented energy infrastructure will find regional renewable hubs cheaper, quicker to build, and less complexity to manage.”

India and China the biggest winners

In this scenario, Rosenstreich suggests countries such as China and India have the most to gain.

An article published in research journal Nature Energy in November suggested that China could be left with more than $1trn of “stranded” energy assets as a result of net zero policies by 2036. But despite seeing more than half its fossil fuel assets rendered worthless, the research suggests China will still enjoy gross domestic product (GDP) growth of 7.1% by the middle of the next decade.

Trevor Allen, BNP Paribas sustainable finance analyst, says that China is a key beneficiary of solar power expansion as the manufacturing base for around two-thirds of the world’s solar panels.

Climate change targets could have an unexpected impact on Asia-Pacific FX with the Aussie dollar potentially strengthening from net zero emissions. Read more…