EM Currencies on Back Foot as Trade War Spirals Further

It is expected that the latest installment of concerns over the United States and China entering a potential trade war will encourage global stock markets to come under pressure this week.

Some indications of risk aversion are already being seen in the markets, with the Japanese yen gaining as a result of market uncertainty and a number of different Asian currencies trading lower due to reduced investor appetite, FXStreet reported.

A number of different emerging market currencies across Asia have begun the new trading week on the back foot from the trade tensions between the United States and China. This includes the Chinese yuan, with current losses close to 0.6%. The Indonesian rupiah, Malaysian ringgit, Philippine peso and Thai baht are just a few of the many Asian currencies to have followed the same lead.

Although trade war concerns between the United States and China will likely act as the headline risk for this week, there are a number of different events that investors will need to monitor. This includes the latest OPEC meeting in Vienna, Bank of England meeting and the Swiss National Bank interest rate decision, as well as the lead up to the Turkish presidential elections on June 24.

There will also be a central banking policy panel featuring ECB President Mario Draghi, Federal Reserve Chair Jerome Powell, Bank of Japan Governor Haruhiko Kuroda and Reserve Bank of Australia Governor Philip Lowe, where any comments on the direction of monetary policy from respective central banks and the impact of the ongoing dispute between the United States and China might have on the global economy could leave a lasting impact on the markets.

This week will also be seen as make-or-break for the British pound, with the sterling seen as a leading contender to be the most volatile developed currency.

Another leading contender for volatility this week will be the Turkish lira. The presidential elections in Turkey on Sunday hold the potential to leave lasting implications on the financial markets, not limited to just the Turkish lira.

President Recep Tayyip Erdogan winning on Sunday will likely be reacted to negatively by investors; persistent fears that an Erdogan victory will lead to the Turkish president exerting more control over interest rate policy and economic matters in Turkey have already encouraged the lira to surrender its recovery from historic lows, following the recent increases in interest rates from the Turkish central bank.

EM Asia FX

Emerging Asian exchange rates slipped broadly on Monday with heightening global trade tensions sparking sharp falls in the region's export-correlated currencies, Reuters reported.

"Asian currencies are facing depreciation pressures on two major fronts...monetary policy divergences have returned to support the US dollar globally. The Fed has affirmed that it will be moving to deliver a total of four, not three, rate hikes this year," Philip Wee, an FX Strategist with DBS Bank Ltd wrote in a note.

Japan's benchmark Nikkei 225 index dropped 0.8% to 22,662.68 in morning trading. South Korea's Kospi lost 0.8% to 2,385.65. Australia's S&P/ASX 200 gained less than 0.1% to 6,096.20.

The Philippine peso lost 0.19% and the Singapore dollar was 0.05% weaker while the Indian rupee marked time.

Chinese, Indonesian and Taiwanese financial markets were closed on Monday for public holidays.

Thailand's baht weakened 1.04% as a combination of comments by Thai Finance Minister Apisak Tantivorawong and concerns about capital outflows weighed on the currency.

Speaking before the Bank of Thailand's monetary policy review on Wednesday, Tantivorawong said on Monday that he saw no reason for Thailand to raise interest rates. Those comments sent the baht to its weakest intra-day rate since end-2017. Thailand's 1-day repo rate has been maintained at 1.5% for more than three years.

The S&P Mumbai Stock Index Sensex shed 73.88 points or 0.21% and closed at 35,548.26 while the Nifty50 index dropped by 17.85 points or 0.17% and settled at 10,799.85.

Meanwhile, global stocks were mostly lower Monday on concerns over trade tensions. European shares sank in early trading. Germany's DAX lost 0.6% to 12,936.10 and France's CAC 40 shed 0.5% to 5,477.31. Britain's FTSE 100 dipped 0.1% to 7,626.71.

Wall Street was poised to open lower. Dow futures dropped 0.5% to 24,995.00 and broader S&P 500 futures were down 0.4% at 2,773.90.