20180504-NATIXIS-Is_the_Asian_cycle_correlated_to_the_US_and_euro-zone_cycle__9页_967kb

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Core Content

This document analyzes the correlation between the economic cycles of Asian countries (China, Japan, India, and other Asian emerging countries) and those of the United States and the euro zone. It explores the transmission of economic shocks through trade and financial channels, and evaluates the role of capital flows in influencing exchange rates.

Main Points

1. Correlation Between Economic Cycles

• Historical Correlation: Only Japan's economic cycle was historically correlated with that of the US and the euro zone.
• Recent Period (2010–2017): The economic cycles of Asian countries as a whole have become decorrelated from the US and euro zone cycles.
• Correlation by Country:
  • China: Weak correlation with the US and euro zone (0.11 for 1998–2017, -0.02 for 2010–2017).
  • India: Stronger correlation with the US and euro zone in recent years (0.37 for 2010–2017).
  • Japan: Moderate correlation with the US and euro zone (0.64 for 1998–2017, 0.19 for 2010–2017).
  • Asian Emerging Countries (excluding China and India): Weak correlation with the US and euro zone (0.07 for 1998–2017, 0.37 for 2010–2017).

2. Trade Shocks Transmission

• Trade Volume: Asian exports to the US and euro zone are significant in relation to their GDPs.
  • China: Exports to the US and euro zone are a large portion of its GDP.
  • Japan: Exports to the US and euro zone are also a significant share of its GDP.
  • India: Exports to the US and euro zone are a notable portion of its GDP.
  • Other Asian emerging countries: Exports to the US and euro zone are also significant.
• Insufficiency for Correlation: Despite the large trade volumes (3%–5% of GDP), they are no longer sufficient to ensure a correlation between the economic cycles of Asia and the US/euro zone.

3. Financial Market Correlation

• Interest Rates: Correlations between long-term interest rates in Asia and the US/euro zone are weak.
• Stock Market Indices:
  • US and Euro Zone: Strong correlation with Japan (0.36–0.51 for weekly and monthly changes), but weak with China and India.
  • Asian Emerging Countries: Weak correlation with the US and euro zone (0.04–0.19 for weekly and monthly changes).
• Capital Flows: Capital flows significantly influence the exchange rate in India and other Asian emerging countries, but not in Japan.

4. Capital Flows and Exchange Rates

• China: Capital flows are not linked to the US or euro zone cycles, but rather to capital controls.
• India: Long-term capital flows have a clear impact on the exchange rate.
• Other Asian Emerging Countries: Capital flows also influence the exchange rate.
• Japan: Capital flows have no significant effect on the exchange rate.

Key Information

• The economic cycles of Asian countries and the US/euro zone have become decorrelated in the recent period (2010–2017).
• Trade volume alone is not sufficient to create a strong correlation between the economic cycles of Asia and the US/euro zone.
• Financial market correlations are stronger for Japan with the US/euro zone, but weak for China and India.
• Capital flows play a crucial role in determining exchange rates, especially in India and other Asian emerging countries.
• Japan is the only Asian country that shows a strong correlation with the US and euro zone in both economic and financial terms.

Conclusion

Despite the significant trade and financial linkages between Asia and the US/euro zone, the economic cycles of Asian countries have become decorrelated from those of the US and euro zone in the period 2010–2017. This suggests a decreasing integration of Asian economies with the global financial cycle, with Japan remaining the most correlated, while China and India show weaker and more variable connections. The role of capital flows in influencing exchange rates is evident, but not in the same way across all Asian countries.

Disclaimer

• The document is intended for professionals and qualified investors only.
• It is strictly confidential and cannot be disclosed to third parties without prior consent.
• It is not a personalized investment recommendation and does not constitute a financial analysis.
• No liability is accepted for the accuracy, completeness, or relevance of the information.
• The views expressed are personal opinions of the authors and do not reflect the views of Natixis or its affiliates.
• The document is not subject to regulatory approval and is not an offer or solicitation for investment.