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Asian Currency Volatility Drops

Asian FX volatility has been contained, but whether that remains so largely depends on how the US-China trade tensions evolve
All Asian currencies have declined this year in the fallout from the US-China trade war.All Asian currencies have declined this year in the fallout from the US-China trade war.

Don’t be fooled as Asian currency swings seemed to be impervious amid an uptick in volatility in its global emerging-market peers this month.

Cushioned by current-account surpluses across most of the region and by China’s pledge this month of a stable yuan, the average three-month implied volatility for Asian currencies dropped 23 basis points this month, according to data compiled by Bloomberg.

That contrasts with volatility for the wider emerging-market universe, which has climbed four basis points amid the twists and turns of the US-China trade fight.

“Indeed, the calm before the storm,” Stephen Innes, head of trading for Asia Pacific at Oanda Corp., said in an email. “We have six weeks to get this trade war ironed out, or local currencies will be in a dangerous world of hurt. But, I don’t think the fallout will be contained to local markets as we could be headed for a complete global meltdown.”

While Asia’s stronger economic fundamentals compared with other developing economies have helped it weather rising US yields and general market volatility better, that doesn’t mean the risk is gone, said Khoon Goh, Singapore-based head of Asia research at Australia & New Zealand Banking Group Ltd.

This month’s relative calm is leading to split views on the outlook for emerging-market currencies and stocks, after a rising dollar and the deteriorating trade backdrop drove the assets to their worst quarter since the 2015 China hard-landing scare.

Sell-Off to Continue

A Bloomberg survey of emerging-market watchers showed the sell-off is expected to continue in the second half of 2018. Still, some strategists and investors, including those from Goldman Sachs Group Inc. and BlackRock Inc., are saying cheap prices, rising corporate profits and strong fundamentals will outweigh risks from a trade war.

An increase in volatility from the escalation of trade tensions would be an opportunity to invest as the global economy still has quite decent growth, Christian Nolting, global chief investment officer at Deutsche Bank Wealth Management, said in an interview in Singapore.

“It’s probably digestible so far” as long as we don’t go into a full-blown trade war, Frankfurt-based Nolting said. The company sees opportunities in Asian equities and the region’s dollar bonds, he said.

Markets on the Lookout

Markets are now on the lookout for whether the US and China will resume negotiations, and how the Asian nation will retaliate if tensions intensify. US President Donald Trump may impose 10% tariffs on $200 billion of Chinese imports after public consultations end on Aug. 30. An initial $34 billion of Chinese goods were already slapped with US duties earlier this month.

“Asian FX volatility has been contained, but whether that remains so largely depends on how the US-China trade tensions evolve,” Goh said. “Further escalation will risk an increase in FX volatility, especially if it leads to renewed yuan weakness which will spill over into other Asian currencies.”

Currencies Dip

Asian currencies weakened on Wednesday as Federal Reserve Chairman Jerome Powell's optimistic comments on the US economy strengthened expectations of more interest rate hikes this year and lifted the dollar, Reuters reported.

In closely watched congressional testimony on Tuesday, Powell said he saw the United States on course for years of more steady growth, while largely discounting the risks associated with a trade war.

Goh added that regional currencies' weakness was also due to the unwinding of long positions after the previous days' advances.

The South Korean won saw the Asian currencies' biggest decline of the day, shedding 0.35% against the dollar.

Indonesia's rupiah dropped 0.24% to extend its losses to about 6% for the year.

Malaysia's ringgit fell for the second consecutive day, pulled down by weak crude oil prices. Energy exports make up a significant portion of Malaysia's economy.

Chinese yuan's weakened on the day, adding to the regional currencies' negative mood, analysts said.

The Indian rupee fell just 0.1% on the day, a much smaller decline than some other regional currencies.

All Asian currencies have declined this year in the fallout from the US-China trade war.

"The Indian rupee will not be much impacted as India's exports to GDP share is very low and India is not as exposed to global supply chains as other Asian countries," Goh said.

"That is why we have seen the Indian rupee, in more recent times, not weakening as much as the currencies of Korea and Taiwan for example."

 

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