Long bets cut on Asian FX; Fed tapering fears, virus spike hits rupiah

Investors turned bearish on the Indonesian rupiah and the Indian rupee, as they cut long bets across all Asian currencies after a hawkish shift in US Federal Reserve's tone put a floor under the dollar, according to a Reuters poll.

Asian currencies face a double whammy from a resurgent greenback, which posted its biggest monthly jump since November 2016 in June as the Fed mulled rate hikes, and highly transmissible coronavirus variants that have kept several countries like Malaysia, Thailand and Taiwan under strict curbs.

Investors reversed their positions on the rupiah and the rupee , compared with two weeks ago, as they went short on the currencies for the first time since early May, the poll of 11 respondents showed.

Traders raised their bearish positions on both the Malaysian ringgit and the Thai baht, while long bets were trimmed on the Chinese yuan, the Philippine peso and the Taiwanese dollar.

Indonesia is still fighting a devastating second COVID-19 wave, and imposed tighter restrictions on movement and air travel on Thursday. In India, cases have dropped sharply but investors are wary of a third wave and the path to an economic recovery.

"Flare up of infections in Asia and a slow vaccination pace is a near-term drag on activity and may keep local central banks dovish for longer," said Sim Moh Siong, FX strategist at Bank of Singapore.

This policy lag compared to their US counterpart would keep the currencies in check, he added.

The high yielding rupee and rupiah may face further pressure as the Fed is also expected to start winding down its bond-buying programme by the end of this year, HSBC analysts wrote in a note.

Firmer US yields and a stronger dollar would dent the popularity of carry trade currencies that prop up demand for regional debt.

Rupiah has weakened 2% since the Fed's meeting two weeks ago, while Indonesia's benchmark 10-year bond yields were up by around 15 basis points.

Bullish positions on the yuan and the Taiwanese dollar were more than halved to their lowest in over a month, after data showed subdued Chinese June factory activity, while Taiwan's export orders slowed down in May.

HSBC analysts were downbeat about the outlook for these two currencies for the rest of the year due to a likely drop in foreign investment, even as they forecast other Asian currencies would gradually stabilise.

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: Chinese yuan, South Korean won, Singapore dollar, Indonesian rupiah, Taiwan dollar, Indian rupee, Philippine peso, Malaysian ringgit and Thai baht.

The poll uses estimates of net long or short positions on a scale of minus 3 to plus 3. A score of plus 3 indicates the market is significantly long US dollars.

The figures include positions held through non-deliverable forwards (NDFs).