Asian Currencies Rise as US Rate Cut Bets Grow on Economic Concerns
Analysts have raised bullish bets on most Asian currencies after mixed data heightened concerns about economic growth in the world’s largest economy, increasing the odds of outsized US rate cuts and tarnishing the allure of the almighty dollar.
Long bets on the South Korean won and the Singapore dollar, the best performer in the region so far this year, increased to their highest since Jan. 26, 2023. Bearish bets on the Indian rupee stayed intact, a fortnightly poll of 12 analysts showed on Thursday.
Singapore's Strength
Singapore is among the few countries in the world with a triple-A sovereign credit rating, reflecting exceptionally strong fiscal and external balance sheets, factors that solidify its position as a safe harbor for investors.
India's Rupee Under Pressure
Meanwhile, the Indian rupee’s current low value against the greenback is largely due to the Reserve Bank of India’s (RBI) efforts to control the currency’s exchange rate, primarily by buying foreign currency to build up reserves over the past ten years, analysts at ANZ wrote.
“The outcome (of RBI’s intervention) is rising FX reserves, unusually low exchange rate volatility and an active use of the forward book to synchronize FX intervention with domestic liquidity conditions,” ANZ analysts said.
Dollar's Weakness
The US dollar’s impressive 5 percent gain against key currencies in the first half of the year has been largely erased as market expectations shifted to more aggressive interest rate cuts.
Data showed that US job openings fell to a 3-1/2-year low in July, indicating a continued easing of labor market tightness, while statements from San Francisco Fed President Mary Daly further reaffirmed the need for rate cuts.
Traders see a quarter-point reduction at the Fed’s Sept. 17-18 meeting as the slightly more likely move, but give a 50-basis-point cut about a 49 percent chance, up from 41 percent immediately before the data, rate futures contracts show.
Other Asian Currencies
Elsewhere, bullish bets on the Chinese yuan rose to their highest since Feb. 9, 2023, and long bets on the Thai baht rose to their highest since Jan. 26, 2023.
The significant yield advantage of the rupee over the yuan, combined with their contrasting prospects and stable exchange rates, has made borrowing in yuan to invest in rupee-denominated assets one of the most profitable carry trade strategies in Asia.
In Thailand, easing political tensions and favorable economic growth have built the case for increased foreign inflows.
Maintaining Bullish Stance
Analysts maintained their bullish stance on the Indonesian rupiah, the Philippine peso, and the Malaysian ringgit.
Conclusion: A Tale of Two Currencies
The recent shift in sentiment towards Asian currencies reflects the changing global landscape. As the US economy faces headwinds and the dollar weakens, investors are seeking out more attractive investment opportunities in Asia. However, the Indian rupee’s performance remains a cause for concern, highlighting the challenges faced by emerging market currencies in a volatile global environment. The outlook for Asian currencies will continue to be shaped by US monetary policy, global economic growth, and domestic factors in each country.
