Asian Currencies Tumble as Fear Factors Multiply

Investors raised their short positions in Asian currencies over the past month, a Reuters poll showed, with bets on the Chinese yuan turning bearish for the first time in over a year as Sino-US trade tensions intensified.

An atmosphere of uncertainty has kept investors on the defensive and in search of safe-haven assets, as the fallout of the US administration’s ‘America First’ agenda spreads to other major economies.

Consequently, demand for the Japanese yen has firmed, while US debt yields have edged higher, underpinned by the US Federal Reserve’s upward path for its benchmark interest rate, with a further two hikes likely this year.

This has kept the dollar supported against a basket of six major currencies. The greenback is set for a third consecutive month of gain.

With trade tensions between the world’s two largest economies escalating, short bets on the yuan are at their highest since November 2016, the poll of 10 respondents showed.

The Chinese currency weakened beyond a psychologically key 6.6 per dollar level for the first time in six months on Wednesday. The yuan has lost over 3% against the dollar this month alone, an unusually sharp move for the closely-monitored currency.

Expectations have grown that Beijing will allow the yuan to weaken further to soften the impact of trade tariffs imposed by the United States.

If the trade tensions were to have an impact on Chinese economic growth in the second half, that is going to have a spillover effect on growth in the region, said Khoon Goh, head of Asia research for Australia & New Zealand Bank.

“Because countries like South Korea and Taiwan do export quite a high portion of their overall exports to China, as part of goods for China to re-export.”

Tightening Liquidity

From Mumbai to Jakarta to Manila, many regional central banks have tightened liquidity by raising rates in order to shore up their respective currencies, stem capital flight and tackle inflation.

At the forefront has been Bank Indonesia, which raised its key interest rate on Friday for the third time in less than two months, intensifying efforts to stabilize the nation's falling currency.

Bank Indonesia decided in its monetary policy meeting to increase the benchmark seven-day repo rate by 50 basis points to 5.25%. The move follows two rate hikes of 25 basis points each in May, the first at the bank's regular meeting and a second increase made during an extra gathering at the end of the month.

Earlier in the week, Southeast Asia’s largest economy said its trade deficit narrowed to $1.52 billion in May, but was worse than expected, due to higher oil prices.

Stubbornly high oil prices have added to current deficit woes among net-importers of the commodity, with India being one of them. The United States has told countries to cut imports of Iranian oil from November, adding further upward pressure on prices as India is one of Iran’s top customers.

Investors increased their bearish bets slightly on the Indian rupee, despite the central bank raising rates in June for the first time in four years. The rupee has been the region’s worst performing currency, weakening over 7% so far this year.

The Philippine peso comes in a close second as the region’s worst performer, prompting the country’s central bank to raise interest rates for the second time in six weeks with short positions on the peso at their highest since October 2008.

“The recent emerging market rate hikes are indicative of a sudden rise in the emerging market risk premium, with investors now demanding a higher return to compensate for perceptions of increased risks,” Mizuho Bank said in a note on Tuesday.

The risk premium is correlated to global trade growth which is under profound pressure from US trade policies, Mizuho said.

The Asian currency positioning poll is focused on what analysts and fund managers believe are the current market positions in nine Asian emerging market currencies: The Chinese yuan, South Korean won, Singapore dollar, Indonesian rupiah, Taiwan dollar, Indian rupee, Philippine peso, Malaysian ringgit and the Thai baht.