Bullish bets on Asian FX trimmed as investors eye high US yields

SINGAPORE: Investors scaled back long positions in Asian currencies as the outlook for emerging market debt soured after US yields shot up, a Reuters poll found, with bets almost halved on the South Korean won and Taiwan’s dollar.

The greenback has recouped some losses since benchmark Treasury yields jumped to more than 1% after Democrats captured the US Senate last week, making potential passage of a large fiscal stimulus easier via debt issuance.

As a result, bullish bets on the Chinese yuan, Singapore’s dollar, Malaysia’s ringgit and the Thai baht were trimmed for the first time since COVID-19 vaccines were announced in early November, the poll of 15 respondents showed.

“The bond market is being cautious about an increase in supply and potential increase in fiscal stimulus from incoming US President Joe Biden’s administration that is resulting in higher yields,” said Mitul Kotecha, a senior EM strategist at TD Securities.

“Therefore, yield differential with some of the Asian currencies looks less attractive.”

Market participants were also worried about Asian central banks’ resistance to currency gains, he added, pointing to the People’s Bank of China expressing unease over the yuan’s rapid rise.

However, several analysts agreed this downturn in sentiment would be short-term, banking on vaccine rollouts and a rebound in exports to lead the recovery for trade-reliant Asian economies in 2021.

The low-yielding South Korean won saw bullish views being cut to their lowest in three months, with investors concerned about the deteriorating COVID-19 situation in the country after the third wave of infections last month nearly broke its healthcare system.

The won has been lagging its peers since, while stocks and bonds were sold heavily by foreign investors in December.

Bullish bets on the Taiwanese dollar, Asia’s best performing currency in 2020, and the yuan were unwound slightly after the central banks there took steps to rein in their soaring local currencies.

Sources told Reuters that Taiwan’s central bank asked banks dealing in foreign exchange transactions to exercise restraint a week after it intervened to keep the local currency in check.

Meanwhile, the People’s Bank of China deployed measures to stem capital inflows to prevent the yuan from moving too fast after it blew past the crucial 6.50 per dollar mark earlier this year.

The Reuters survey is focused on what analysts 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.

The poll uses estimates of net long or short positions on a scale of minus 3 to plus 3.