Investors turned bullish on most Asian currencies for the first time since early last year, a Reuters poll showed, as risk appetite rose on hopes of a halt to the US rate hike cycle, and the world's top two economies settling a months-long trade row.
Thursday's poll of 13 respondents marks a shift in the outlook of many market participants for emerging Asian currencies, as developments in the US-China trade talks raised hopes for a breakthrough in a dispute that has lasted for much of 2018 and ignited fears over its impact on global economic growth.
Bearish bets on the Chinese yuan were near neutral, situated at their lowest since February 2017, as delegations from both countries ended talks on Wednesday with apparent progress on issues, including purchases of US farm and energy commodities, and increased access to China's markets.
But with the trade talk outcome still uncertain, failure could quickly reignite pressure on the yuan with some still expecting it to breach the key 7-per-dollar mark on dimming growth outlook.
The persistent tensions had boosted safe-haven demand in 2018, with the US dollar being one of the prime beneficiaries. However, in recent weeks, the dollar has lost momentum on US growth worries and a dialling back of rate hike expectations, benefiting emerging market currencies.
Bets on Indonesia's rupiah turned bullish for the first time since early February 2018, a stark about-face for a currency that was among last year's worst performers.
The shift in sentiment was also echoed by the country's finance minister, who on Tuesday said the rupiah will have the "tendency to appreciate" in 2019 due to a shift in "global dynamics".
Short interest in India's rupee, 2018's worst performer, were down to their lowest since February, as oil's sudden slump in the final quarter of last year revived appetite for the unit in a country heavily dependent on oil-imports.
However, a separate Reuters poll predicted that the rupee will face pressure yet again this year, despite its recent revival, due to an expected economic slowdown and uncertainty around national elections in May.
"While the increase in bullishness on Asian FX is justified given the Fed's dovish shift in tone, we would caution against expecting significant further strength in the near term," said Julian Wee, a South Asia investment strategist at Credit Suisse.
"Any adjustment will likely be limited to merely a reduction of the pace of hikes rather than going to flat rate trajectory, never mind cutting rates."
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.
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 on US dollars.
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